Here is some general information about location services. How individual apps in their functionality are affected by turning these off, depends on the app.
For the moment - iPadOS 16.1 - there are a few problems caused by the location services affecting Wifi connections in some scenarios (Macbooks, routers, printers; to be clear, there are other sources for Wifi-related problems like e.g. private relay affecting router Wifi connectivity).
If you want to see what’s exactly happening when you use SideCar between iPP and MBP I suggest monitoring the connection using e.g.
Wireshark.
Just anectdotically: I encountered periodical Wifi drops and reconnects after updating different iPPs to iPadOS 16.1 and traced some down inspecting packages sent. In my case the location services sends a huge amount of unsolicited packages, which in the end let the “peer” e.g. a router or MBP reset the connection. And if “auto connect” is turned on in iPadOS for Wifi-connections, the iPad reconnects, establishes a connection, packages are sent, the peer resets the connection at some point, and so on… periodical fun!