Actually, it does. In Oblivion, NPCs went about their business all over the province no matter where you where. A few of them even travel between cities.
In the Oblivion Construction Set, NPCs have a checkbox called 'No Low Level Processing'. When this is checked, which it is for most of the NPCs, the game does not process any of the NPC's AI unless the player is in the same cell as the NPC.
There are a few NPCs who don't have this box checked, which allows them to travel around the world and such even when you're not there (like M'aiq), but this certainly isn't the case for every NPC as that would lead to performance issues.