To do proper hardware emulation in software you tend to need dramatically more processing power because you're (effectively) running a full simulation of the hardware ... Years ago I was given estimates that it took 10 to 20 times the processing power of systems like the Colecovision, Atari, NES, SNES and Genesis to properly emulate the hardware.
There are other ways to emulate hardware, and the most common alternative is instruction translation; which effectively works by converting an instruction from one architecture to another architecture; and then only doing a full emulation on the instructions that can't be translated. Since many/most of the instructions in one architecture operate differently than the instructions in another architecture, instruction translation tends to be very buggy.
You can follow a hybrid approach, and maintain a database of games with the instructions they need to be fully emulated in software but this is a time consuming and expensive approach.
Regardless of the hype, the PS3 is simply not powerful enough to fully emulate the PS2 and Sony was forced to use instruction translation when they eliminated the emotion engine to cut costs; and they had no desire to cover the costs of creating a database of thousands of games with the "settings" to make the game run well.
