Yes you would still be able to fly an Israeli campaign in a merged install from SF2:E if you also have SF2:I installed..
What Wrench is saying is that by only having what you need in a particular install that makes it a more customised experience.
For example, when I'm choosing a mission in one of my SF2:I Installs (I've got 2: 1948 - 56 and 1967 up to date) I don't want to be scrolling through RAF Harriers, Spanish F/A-18s, Argentine Super Entendards etc. that have no place in the region, spoil the immersion and just clog up the game.
Yes, I've got a basic SF2 with all and sundry in also, but I rarely use it because it's just so slow to load sometimes.
So, all my installs are 'merged' (i.e. they include all of the stock planes, terrains, campaigns etc), but are 'separate' in that I tailor them for the specific experience I want.
Hope that makes sense.
Here's a screenie of my desktop today with my SF installs on the right, although with a 3 day Bank Holiday weekend to play with and a glaring gap where a SF2: WW2 Pacific install should be that might change over the next 36 hours!
Welcome to the wonderful world of Strike Fighters and Combatace!!