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Game Informer interviewed TPCI and asked them why Sword and Shield went with DLC instead of a third game
>There was an element of apprehension in moving to a downloadable model, but we were confident that players would enjoy exploring the new environments, uncovering new storylines, and meeting new human characters and Pokémon in both The Isle of Armor and The Crown Tundra. With past titles, players generally had to collect and raise their Pokémon completely from scratch, so with a DLC we thought players would enjoy being able to use their favorite Pokémon right out of the gate.
https://www.gameinformer.com/2020/11/11/why-pokemon-sword-shield-expansions-replaced-a-third-game