Any political party has a variety of "factions" that have different opinions on different topics. The kind of system you're seeing here is what happens when these "factions" have a lower bar for splitting out and forming their own party. In practice, this means that instead of having a binary or ternary split in the parliament, you get a smoother transition between the extremes, so it's much easier to find parties that will collaborate.

If you have only two or three parties, the distance between them will typically be so large that they can't really collaborate on anything. However, when you have 6-8 parties, you'll typically be able to find a group of 3-4 parties that are able to form a majority compromise on any given issue. Collaboration becomes more fluid (instead of constant "us vs. them"), compromises become easier, and voters get to express a more nuanced opinion at the polls (not just "left vs. right", but "I want left-wing tax policies, combined with this specific environmental profile, and these specific stances on education").

This only becomes dysfunctional if the parties/politicians are unable to collaborate and compromise effectively. However, countries with a parliament like the one you see here will typically foster politicians that are able to collaborate and compromise. You won't survive as a politician in this kind of parliament if you're a hardliner that refuses to budge on anything.