Yep, the AI does respond to suppressing fire, though in something of an unusual manner. The internal logic only registers bullets that hit
near where they are, not bullets that fly over them.
So suppression has to be focused on the ground around them or the cover they are behind, rather than being a 'keep their heads down' kind of thing. But that's a technical detail. It reduces their 'courage,' making them less likely to run or attempt a movement, and increases their 'aiming shake.' Some types of enemies are harder to suppress than others. SF-types (including the entire Molatian Army, due to a funny bug) have a much higher base courage, so they are more capable of moving under suppression. The Takistani Army is mid-tier, and insurgents are the worst.
In Takistan, engagement ranges at or exceeding 400-600m are the best way to go in my experience -- except as OPFOR or when I want to do something silly, it's best to engage at longer ranges, to take advantage of the superior optics usually found on the BLUFOR hardware. Fewer players die like this, though as a historian of the Imperial Japanese Army, I'd be happy to order close-combat charges! :3
The M16A4 in real life (and in ArmA, any weapon using 5.56, since the velocity for 5.56 in ArmA is based off a 20" M16 barrel if I remember correctly) is considered effective against a point target to 550m, and even further against an area target. If you have an ACOG and are not being suppressed/hurt (shaking), those shots are gravy in ArmA, since ArmAguy is practically a gold medal shooter. Somewhat more difficult with an Aimpoint, but it should still be accurate fire. The SAW, fired in proper 3-5 round bursts, is area-effective to the same range all day in ArmA.
This is outside the effective range of the AK-47, too, though ArmA's badniks seem to have the AK-74 more often than not, which is ballistically comparable to 5.56. I try to prefer long-range engagements when we have fire support like CAS. In those situations, though it is less glorious than racking up the kills, infantry is often better used to pin down the enemy until the bombs can get there, then move in and mop up.
So I don't think it's a range/accuracy issue, nor the AI's movement pattern -- for movement, timing is everything, and hitting moving targets is really hard in real life and in ArmA, especially when bullet time of flight is a factor. Plus often we're fighting guys in civilian clothes with a rifle and like four mags, so I'm okay with them being agile.
I think you did catch the right answer, though. Many, perhaps most, of our missions place the human team against 4:1 or often very worse odds. This is why ammo is often running low. But I think it's a gameplay compromise -- a human squad can wipe out an AI squad in about one second. As an example, this is what I use in Dynamic Mission Machine:
_num = playersNumber dmm_friendly;
_numgroups = round (_num * 1.05) + 1;
i.e., for every single human player, spawn 1.05 enemy groups, plus one extra no matter what, and round. So five human players may face 6 entire squads, vehicle groups, etc. And we can win pretty consistently. Humanity is a huge force multiplier.
Something I try to create in my missions is dramatic tension. (Often what comes out is frustration instead, but when it works it works -- those who have made the long crawl to the bridge outside that uranium mine to place satchels know.) Ammo running low creates tension, at least as much as the sudden apperance of enemy vehicles or aircraft. Picking up OPFOR weapons isn't unrealistic, i.e., it does happen for certain, but it's not that common I suspect and can be an immersion breaker.
Lately I've been including extra ammo of all types in the HMMWVs to alleviate this while keeping tension up. Also, in many of the new Marine missions, almost everyone in the fireteam is carrying an extra 100rnd box for the SAW in their pack. Riflemen running out of ammo is because they are often suppressing or semi-suppressing, when the SAW should be keeping a higher volume of fire while riflemen (and especially Squad Designated Marksmen) only deliver accurate fire.
Of course, I dunno. The real Marine Corps is replacing the SAW with the magazine-fed M27 IAR, which is really nothing more than a glorified M4 in terms of what it actually does. Perhaps 'volume of fire' as an infantry doctrine is outdated. But I think they just want HK416s...
But, dangit, when I say shoot at them I mean shoot at them!