Yes, with the updated install diskettes, you should get updated kernel, os2ldr, ibm1s506.add driver etc. The updated ibm1s506.add should allow large hard drives. You still might have problems with your BIOS and booting from the large drive. I remember having to jumper a drive to small, boot from the beginning of the drive and once booted, the whole drive was visible.
The updated install disks should also be set up that the versions of stuff on the diskettes are installed instead of the versions on the CD.