I see no problem with Larian's concept. The effect you've mentioned happened not because they crammed a lot of places of interest together but because they've poorly disguised the grove.
The main issue with Larian's implementation is with scale.
Their areas are very condensed, which creates a narrative dissonance because of the lack of distance between things (Which also gets exacerbated by the zone changing between acts). This isn't exclusive to just Act 1 and the grove. But other things too, for example, why is their a town literally 2 feet outside of Baldur's Gate? In what universe is it logical to make a town a stone's throw away from one of the largest cities?
They have implemented some additions, like how Underdark, Grymforge and Mountain Pass are their own zones rather than cramming them into a singular map for their act... But then these (Especially Grymforge and Mountain Pass) are very small zones because of the lack of content in them (Mountain Pass being literally just the Lathander's Light puzzle, the Creche and that 1 group of undeads on the way to Elminster)
In games like DA:O or PotR, they exclusively do the "Every location is just a teeny tiny location that you travel to via a world map" thing. But it doesn't offer scale either, as the "Travelling" is just a glorified loading screen with the only other aspect being the chance for random encounters (PotR also had some time based interactions, notably early on when there's a scripted attack on the base that also signifies certain other locations being emptied of encounters)
A larger seamless world provides the best feeling of scale, as you actually travel distances personally so you feel the scale.
The major caveat is that in order to do scale, you have to implement ways to deal with the scale because it's not fun to spend hours travelling around a map (Even Eurotruck Simulator, a game about spending hours travelling around a simulated real world, cuts a lot of fluff to make routes shorter so it doesn't take you literally days to drive across the globe)
So things like, mounts, teleports (Like BG3's waypoint runes) and other travel options (In DOS2 your base was a ship, which presumably can sail to different ports. You can also offer caravans to "Fast Travel" between towns)
Of course, with scale also comes the other issue... Which is density. Which is a continual problem for open world games, such as Elden Ring or Ubisoft games. Where they want to make the worlds engaging by having density of PoIs because of the old Skyrim ideology of "You can wander in any direction and quickly run into something interesting" - Which leads to content shortages and thus a reliance on copy/paste (Hence all open world games reusing the same PoIs repeatedly).
So it often becomes a case of pick your poison. Do you want scale? Then you either get barren environements or copy/paste content. Do you want interesting environments? Then you get tiny worlds as everything is crammed into a small area.
World map location systems aren't the solution either as they tend to be small, barren locations and simply cut out the exploration entirely, turning the game into a theme park simulator where you just load into a bunch of unconnected locations, do like 2 things, then leave for the next unconnected location.
