Eh... I mean if they were realistically proportioned Chorrol could be a massive city and still be dwarfed by the IC. You could keep the IC an amazingly huge and bustling place of the imagination and still have the game set in and around Chorrol, a huge city itself, and the villages in it's immediate surroundings.
The thing is that, frankly, no one fucking cared about Chorrol because no one fucking heard about Chorrol prior to Oblivious.
It could be on Pyandonea for all that matters.
OTOH some of Vvardenfell's settlements and locations have been in game back in Arena - I'm speaking of Ald'Ruhn (Old Run - phonetic mangling), Balmora (Stoneforest - literal translation) or Maar Gan (Markgran Forest), then the lore on the province was expanded and built upon in Redguard. At Redguard's release Vvardenfell was reinforced as important landmark (remember that you were raiding DU for a piece of macguffin in Arena), most important one, at least judging by the volume of dedicated text in PGE1. It was also naturally *THE* place where a plot centered around DU, HoL and a bit of ancient treachery had to be set.
The only established places potentially holding similar relevance to the plot of Oblivion or any its modification would be Planes of Oblivion and the Imperial City itself. No one fucking cares about Chorrol that was, along with Cheydinhall, Bravil and pretty much all but some of the Colovian settlements, only established for the need of this plot and yet only play tangential or otherwise replaceable role in it. It shouldn't have been in game because it's not a game about it, while Morrowind was a game about the Isle of Vvardenfell.
Natural borders is more the core issue I think, yes, but even in Oblivion there is a lot of border area that is only blocked by invisible walls.
Wouldn't it have been better if it could do without those?
It easily could have.
For reference:
http://www.imperial-library.info/content/pocket-guide-empire-and-its-environs-first-edition <- read
Seek in-game references to lore established by PGE1 in Morrowind, Oblivion and Skyrim.
Check for contradictions as well.
Find the one game that doesn't belong.
Skyrim's worst problem, by far, are those damn dragons.