Hello Stephen,
Thank you for choosing Microsoft Office Community and thanks for providing us an opportunity to assist you.
We tried to reproduce an issue on our side following your description and I can confirm the same behavior.
Additionally, if you link the document this way or embed as object then this document turns to Read-Only and doesn’t let to edit it anymore.
I’m afraid that this method works only for Word documents that are stored on your local device, but not for files online.
We understand the inconvenience and apologize for it, to address your concern we suggest you leave feedback, so the developer team pay attention to this issue. How do I give feedback on Microsoft Office?
Best Regards,
Igor