Why is 470 ohm resistor necessary ?
Im not 100% sure if I remember correctly but the resistor is needed on 6 button controllers (and some autofire ones) with the multiplexer chip is to function correctly and the resistor is for safety, and by doing this you can use more buttons with software that supports it (slim selection of software that supports this).
I dont think you need the +5v at original pin 5 wire at all on 3 button gamepads, but havent fiddled with em for a while so im not 100% sure.
There are much more qualified persons here on A.org who probably can answer this better then me

In regards to Megadrive controllers, is it just the 2 buttons that'll work with the simple mod people have mentioned here, or is it possible to mod as a pad for a cd32?
I have never owned a CD32 but the outputs are not the same, I guess you could program a PIC adapter to get the outputs to work for CD32, no idea if anyone made this or are selling this tho :/ but if you could get your hands on a CD 32 IC and wire it correctly inside the MD gamepad I see no reason why it would not work.