Incorrect. You can't ADD quality by re-encoding. You can only LOSE quality. In a PERFECT WORLD you would KEEP the same quality but gain the benefit of fastforward/rewind/skip.
There are exceptions, though. My Pioneer 525 does a HORRIBLE job of rendering MPG1/VCD... so upsampling to MPG2/DVD will always LOOK better on my Pioneer. But it won't actually BE higher quality. On a unit that does a good job with MPG1, the new encode would look worse and sound worse.