In theoretical physics, compactification means changing a theory with respect to one of its space-time dimensions. Instead of having a theory with this dimension being infinite, one changes the theory so that this dimension has a finite length, and may also be periodic.
Compactification plays an important part in thermal field theory where one compactifies time, in string theory where one compactifies the extra dimensions of the theory, and in two- or one-dimensional solid state physics, where one considers a system which is limited in one of the three usual spatial dimensions.
At the limit where the size of the compact dimension goes to zero, no fields depend on this extra dimension, and the theory is dimensionally reduced.