In most any endeavor, it's true that working on your skills is much more important than upgrading your equipment: practice is the way to improve, you can't buy your way into being better.
But this is significantly less true at the bottom end of the guitar spectrum. Cheap guitars really are worse -- not just in the quality of their sound or their durability, but in their playability. It is much more difficult to get a really cheap guitar to work right. A $100 guitar is going to be much more difficult to play than a $500 one.
That's primarily due to the "action" -- the height of strings above the frets. On a cheap guitar, the (im)precision of the components -- the bridge and its springs, the neck tension bar, etc., conspire to make it so that the higher frets have much higher action (or else the lower ones buzz). That forces the player to squeeze the strings harder to the neck, which is painful, and is less forgiving about finger placement within the fret, requiring that fingers go closer to the fret rather than allowing more space behind it.
The end result is that a new player, not wanting to invest too much money in something that he doesn't know if he'll like, is more likely to be discouraged and give up. If he'd had a better tool from the beginning, success would have been more likely.