I can confirm that the firmware that is loaded on the LVW-5005 (or any other Lite-On standalone) is different to the firmware loaded on the actual IDE drive itself. For example, the firmware that is loaded on the LVW-5005 contains the software, menu and so on for the LVW-5005 itself to operate, where as the firmware for the IDE drive only contains the software for operating the optical drive, such as handling the reading of discs, writing strategies, etc. A good example is when it comes to region coding - If the optical drive is region free and the LVW-5005 is not or the optical drive is region coded and the LVW-5005 is region free, it will refuse to play discs from another region.
When the DVD recorder picks converts the picture to digital, the recorder's own software does the actual checking for Macrovision signalling. In fact, on the HDD models, the IDE drive itself is not used at all when recording and playing back content via the HDD.
Unfortunately, I am not fully sure what happens when new firmware is installed on the LVW-5005 itself, such as whether this in turn updates the IDE drive's firmware. However, from what I recall reading about, users who change the optical drive in their Lite-On recorder are advised to first update the firmware of the LVW-5005 with the old drive, update the firmware in the IDE drive using a PC using region-free firmware and then swap the drives.
Good luck with the swap.