The issue is not die size, per se. Hundreds to thousands chips are fabircated on large wafers which are then cut into individual dice. Therefore, a smaller die size means the manufacturer realizes more dice, and potentially, more profit per wafer.
Each step toward smaller feature size of various components on the die (transistor parts, resistors, traces, etc) means more components can be squeezed into a given area. This means these features are closer together which results in lowering the breakdown voltage of electrical insulating material between the various components and conductors. This is why newer IC's with smaller features must operate at lower voltages.
Power = Volts x Amps (P = EI). Therefore, the heat generated in an IC can be determined by multiplying the operating voltage across the IC times the current used by the circuit at that voltage. Fortunately, with each drop in feature size, the drop in operating voltage at a given current results in less power for a given number of components. The same is true as new component topologies are developed that require less operating current.
It's a matter of power dissipation over area. In other words, how much surface area is available to disspate the power used by the circuit. The answer is engineering newer, more efficient ways to remove heat from the die. In larger terms, it's similar to the improvements in the efficiency of CPU heatsinks as they moved from large chunks of aluminum with fins and fans to heat pipes.
Smaller feature size also means lower capacitance between features which allows faster circuit operation. Unfortunately, the smaller die size makes it more difficult to remove the heat that IS produced by operation of the circuit.
Another problem with smaller die is that it involves newer technologies that may or may not produce more working dice (yield) as a percentage of all the dice on a wafer. The yield at any given feature size tends to improve over time as manufacturers learn more about how to produce it.
The bottom line is that smaller die size is better... with several caveats. It's all money driven. How many working dice can be manufactured at what cost and with what reliability? IC manufacturers look at many sometimes conflicting cost-benefit curves to determine the optimum technical combination for a given new product line.
The bottom line is that smaller die size is better... with several caveats. It's all money driven. IC manufacturers look at many sometimes conflicting cost-benefit curves to determine the optimum technical combination for a given new product line.
And we haven't even touched the issue of the greater component density realized by going from two dimensional to three dimensional feature designs.