Contrary to some things. The diameter of the slug does matter a bit. Momentum and blah. A .223 - 5.56 will just go in and bounce a round, while a .30 - 7.62 goes right through and takes out lumps of flesh. I knew a warrant officer who's served in Ireland and had to shoot a car running a road block. They had FN -FAL's at the time ( 7.62x51 ) which took out the backs of every one in the car, " They literally had holes the size of oranges when we took them out. The 5.56 is accurate but bounces when it hits bone, rather than take it with it."
It's also and issue of accuracy and range. A 7.62 is more powerful but has a very quick drop in momentum after about 600-800 meters. Not that many soldiers, obviously snipers, engage at those ranges. The 5.56 has a tendency to remain more accurate for a bit longer.
This is affected by the power, which is not completely related to the length of the propellant. The mix is also important, the US army uses a more powerful mix in their 5.56's to most other nations.
Some of the issues with bullpups - yes they can explode in your face, but, anything that explodes with that force that close to your face will hurt! I have friend who had an M4 malfunction and scar her right brow - luckily she escaped with her sight. Most other problems are either due to laziness or crap design. Like the magazine touching the ground. A lot of old guns have issues with weight.
In terms of changing guns. They stick with what works. The M1 carbine proved successful in WWII and we now have a modern varient for a sniper rifle - [edit] the M21. Russia designs everything around the AK barrel and working parts, also since WWII. All modern guns have pretty well evolved from WWII designs even the L85 was designed in 1944 and was only, intended as, a short term replacement SA80 - Small Arm [of the] 80's.
In short, They stick with the Colt M16 & varietns because they want to.
Check this out too, great over view of lots of guns!
Source: http://world.guns.ru/index-e.html