I am guessing that was one of Sony's cheapest Hi-8 models (also notice it has only mono sound). Manufacturers hold back features from the low end models to give sales people the opportunity to upsell consumers to a higher priced model with more goodies (S-Video, stereo sound, remote control, etc.)
Color video signals are made up of luminance, which is grayscale and has all the "detail" of the image, and chrominance, which is a lower resolution signal with all the color information. With VHS and Video8/Hi8, those signals are stored separately on the tape.
An S-Video output has separate pins for each signal, and therefore keeps them separate, which helps maximize their fidelity.
The composite output in the "combined A/V OUT jack" combines (composites) the luminance and chrominance into a single signal. While there is nothing wrong with that per se, the two signals eventually must be separated again. The technology that does that is called a comb filter, and the quality of comb filters varies widely. If your capture device has a good comb filter then it can separate the luminance and chrominance signals fairly accurately. If it's got a mediocre comb filter then the luminance and chrominance signals produced will have degraded quality. Manufacturers don't publish specs on the quality of their comb filters, so the only way to know if it's good or not is through observation.
It's best, therefore to leave comb filters out of the equation if at all possible. By using S-Video throughout the capture chain the luminance and chrominance will stay separated for their entire journey from the tape to your AVI file on the computer.