Sony made the exact thing that you wanted with their compact line, a smaller phone with flagship internals, but obviously it's not selling enough to sustain themselves. And have you looked at the offerings from Huawei, Oppo and Xiaomi? Even their cheapest offerings have at least 6.5" screen or larger. These companies cannot afford to cater to the small phone crowd as the return is not enough to justify the cost of R&D, manufacturing, logistic, etc.
Foldables are different. They are the Ultra premium with bleeding edge tech. People are already complaining how expensive and overpriced the iPhone 12 mini. Do you think people want to pay $2000 for a small 5.4" Galaxy phone?
Nobody denied that there are a small niche demand for smaller phone. But that demand is not big enough to justify the R&D and cost for pretty much everyone except Apple. Apple can do it because they can afford it, raking the most profit compared to the rest of phone makers. Even Apple themselves said it in their announcement of the mini, that only Apple can do it. Also, the mini helped Apple increases the ASP of iPhone sales, by tricking most people into paying $100 extra for the regular iPhone 12. That Tim Cook is a master when it comes to profits.
