I'm fairly certain that, like many other games, that setting limits your maximum in-game framerate to whatever you've set in Windows (or your graphics card driver settings) for your screen's refresh rate, e.g. 60 Hz, 75 Hz, or whatever.
In some games this can reduce visual "tearing" effects, due to incompatible game FPS speed and screen refresh rates.
It can also help your GPU to work less hard (lower temperatures) as it means your GPU is not constantly trying to run the game with the highest possible FPS it can achieve (not usually a problem when running a very old game such as SH3 with modern graphics cards).
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