I think chips can be extremely small, as seen in this post: Small GPS Tracking Chips. That is really, really small. The problem with most GPS tracking devices is not the size of the chip, but all the other stuff that has to go with it in order to make it work right. The phone modem, power supply, and antenna all take up space and make the devices much larger than a simple chip would indicate. Really small chips are useful for making devices smaller, but until advances in power supply size are made there will always be a size issue for these devices.

-Joe