This is an interesting question and which I find very pertinent. As the OP said, there are two options:
1. to choose a real town
This works best if you know the place very well or, alternatively, if you can visit the town regularly. It's still a good idea to study some maps and have an idea of traffic and such. If you can't visit the town, try a virtual tour on Google maps (navigating the photos as if you were driving up and down the streets) and study maps, listen to the local radio to get a feel of traffic, etc.
You can still invent businesses and even streets, or you can have your characters visit real restaurants and live in a specific house.
Personally, this is my favourite approach. Nevertheless, I sometimes invent a house, a street or the occasional business.
- your readers know you take details seriously and that you respect facts
- there's the thrill (for the writer and the reader) of knowing you can go to that town and trace the characters' movements
- you still have the freedom to invent a bit (but do write a note somewhere to inform the readers)
- works best if you want to set the events in a big, famous city... or if you're using a very small place (like your neighbouring village), since it's easier to research it
- it's a lot of hard work
- it's a bad idea to have negative events happen in real businesses (e.g. a hotel room poorly cleaned, rude waiting staff at a restaurant, ...)
- if you can't visit the place, you risk portraying it wrongly
- it's a lot of hard work
2. to invent a town
If you have better things to do than spending your time researching, invent a town. However, if you're aiming to set the story in a big famous city, inventing one isn't usually the best option. Even if you're going overboard and creating an extra county, province, state or even country, you still should mention real places in the neighbourhood of your invented town. It will help to ground your invented town in a real country/state rather than in a 'once upon a time' kind of setting.
I still advise to plan the town in as much (or as little) detail as necessary. E.g. shade off an area for the rich neighbourhood without bothering to map out streets, and detail the businesses lining the main street which your characters will often walk up and down.
- works best for small to average towns
- you don't need to worry about research
- you can invent details for the town as you need them instead of planning the whole thing from the beginning
- greater flexibility
- it's easy to lose track of details and give contradicting descriptions, so one really must invest in a map, even if only to draw it as the story advances and more places are invented
- ... there's no thrill of dealing with real places where one can actually follow the characters' movements? At least for me, that's a disadvantage.
You also mention
the actual laws in force in that country
Well, that does require more detailed research. There's no way around it, I'm afraid. I suggest choosing a country that is easy to research.