Well I've always found that the effect of smaller parties on government policy is indirect. Rise Of UKIP motivated by Euro scepticism for example prompted the Conservatives to lean to the right and deliver a referendum on the issue. They've definitely had an indirect effect on our democracy. If the Lib Dem resurgence continues that will prompt Labour to react too.
Your version of democracy is one which prioritizes representation over effective government - something which I dislike because a government should be clearly accountable and unburdened with internal division.
PR systems are undesirable because it prevents effective government. The concept of effective government through FPTP has been essential to the UK. You just need to look at the performance of the coalition to see how any PR model would be highly detrimental to the UK especially in a time where we need consistent policy