The original concept for T2 was to have TWO Ahnuld-model terminators come back, one good and one bad. So that he wouldn't have go through the hassle and expense of the FX necessary for Anhuld to fight "himself", Cameron made them seperate people.
Since the bad guy had to be a realistic threat to Austrian Oak, he could have gone bigger (i.e. The Rock's size) which would've been tough, because the bad Terminator wouldn't have blended into crowds that well. Remember, the whole idea was for them to infiltrate the human's camps, so having some seven-foot-tall behemoth wandering around would call too much attention. Figuring that things get smaller as they get more sophisticated (seen some of the new laptops lately?), Cameron went with the shape-shifting, near-indestructible, smaller version.