They have explained how semiconductor has advanced and you can store more in a small space but that is not the primary facto for a USB drive size. Just compare USB drives to Micros SD cards.
The size of a USB stick is the primary one that is simple to handle and easy to make.
There are smaller dives like the [Samsung Fit Plus](https://www.androidcentral.com/sites/androidcentral.com/files/styles/large/public/article_images/2020/04/samsung-fit-plus.jpg) that exists up to 256 GB or a [Sandisk Cruiser Fit](https://images.mymemory.co.uk/resize/ZT0xMjA5NjAwJmg9NTAwJnE9NzUmdD1vdXRib3VuZCZ1cmw9aHR0cHMlM0ElMkYlMkZzdGF0aWMubXltZW1vcnkuY28udWslMkZtZWRpYSUyRmNhdGFsb2clMkZwcm9kdWN0JTJGNiUyRjQlMkY2NDkyMjQtNC5qcGcmdz01MDA=/) that exist as a 64 GB drive. They are quite small, you will away be limited by the size of the USB connector and something to hold on to remove it from the computer.
But the start to be impractical small and smile to loose too for most application the commonly used size is the more practical option.
I think something like a [Kingston DataTraveler Kyson](https://media.kingston.com/kingston/key-features/ktc-keyfeatures-usb-dtkn-2-lg.jpg) that is longer but has the same size as the USB port is a good compromise to make it easy to hand and at the same time thinner than most other drives.
A very small drive will cost more to manufacture so a bit larger with a simple circuit board of commonly used components make the manufacturing simple with equipment that make other elections devices.
Short answer, efficiency.
Long answer, technology has gotten better at creating smaller and smaller components. When TVs were new and electrical engineering was in its infancy, a 13” tube TV needed a buffet table sized cabinet to hold all its workings. The ability to make circuit boards and processors was so primitive. Now we can right all of those components on a chip the size of an Oreo cookie.
Through advancements in programming and construction we can now cram more information in the same space.
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