Anyone who has lived in California at some point in the past decade knows that direct democracy is a disaster. Ballot initiatives create service (and corresponding spending) increases and forbid tax hikes, leaving the elected legislature unable to balance the state budget.
I can understand how cultural homogeneity could impact the decision-making process (though Switzerland is a country of four official languages, so it's not that homogeneous), but I don't see how size matters. Care to elaborate?
Among other things, it has to do with the practical allowances for different communities of opinion, or factions within the polity. The smaller the group, the less opportunity there is for distinct subgroups to form, especially ones in opposition to others. There's also a more uniform experience of the polity that tends to shape opinion. The overall effect is that there's less variety of opinion, which makes direct democracy a closer approximation of the polity's feeling on something.
Just as you have economies of scale, there are diseconomies of scale, many of which result from combinatorial explosion in communication channels, and are as applicable to political as to industrial process: http://en.wikipedia.org/wiki/Diseconomies_of_scale