Alarming trends in childhood obesity even among preschool children have re-focused attention on the importance of physical activity in this age group. With this increased attention comes the need to identify the amount and type of physical activity appropriate for optimal development of preschool children. The purpose of this paper is to provide the scientific evidence to support a link between physical activity and biological and psychosocial development during early childhood (ages 2–5 years). To do so, we summarize pertinent literature informing the nature of the physical activity required to promote healthy physical, cognitive, emotional, and social development during these early years. A particular focus is on the interaction between physical activity and motor skill acquisition. Special emphasis is also placed on the nature of physical activity that promotes healthy weight gain during this period of childhood. The paper also discusses the strongest determinants of physical activity in preschool-age children, including the role of the child’s environment (e.g., family, child-care, and socio-economic status). We provide recommendations for physical activity based on the best available evidence, and identify future research needs.