Yes, on LCD screens there is a difference.
LCD screens (unlike CRTs) have a native resolution, since the pixels are physically part of the screen. That's the only resolution they can really display at. Any other (lower) resolutions are achieved by smoothly stretching the image to fit the resolution of the screen.
This works moderately well for resolutions that are close to the native resolution. However, for resolutions that are much smaller, the end result is extremely blurry.
By first pixel-doubling the graphics to 640x400 resolution, the game becomes much sharper.
Edit: This isn't just my opinion or theory. I actually tested this on an AGS game. Here's a (mocked up) comparison, made in Photoshop by scaling a 320x200 and a 640x400 version of the same image up to 1024x768 using bilinear filtering:
This is pretty much what the two modes look like on my laptop screen. I think you will agree that the one on the right is sharper and better.