There were many great cities in the ancient world at the time of Jesus' birth. Until recent times the world has not known cities like those in all of history. But Bethlehem was not one of those. Not even close.
I have some understanding about small rural towns since I grew up in one. The town of my childhood is named Claypool, Indiana. That just sounds like a small town, doesn't it? It was out of the way - a mile or so off of Indiana Route 15 on County Road 700. No one came to Claypool on purpose.
One huge difference in this small town of Bethlehem, however, is that a couple of world-changers were born there. The first was the great king of Israel, King David. And because it was the place of his birth, it set the stage for Jesus to be born there since his earthly father Joseph was a descendent of David.
That answered part of the question. Plus, it fulfilled the prophecy of Micah 5:2 - "But you, Bethlehem Ephrathah, though you are small among the clans of Judah, out of you will come for me one who will be ruler over Israel, whose origins are from of old, from ancient times."
So, Bethlehem was the birthplace of David and the prophecied place. Those are significant. But, still, why Bethlehem?
Bethlehem means "house of bread". What better place for the Bread of Life to be born than in the "house of bread"!
"Then Jesus declared, "I am the bread of life. He who comes to me will never go hungry, and he who believes in me will never be thirsty. But as I told you, you have seen me and still you do not believe. All that the Father gives me will come to me, and whoever comes to me I will never drive away. For I have come down from heaven not to do my will but to do the will of him who sent me. And this is the will of him who sent me, that I shall lose none of all that he has given me, but raise them up at the last day. For my Father's will is that everyone who looks to the Son and believes in him shall have eternal life, and I will raise him up at the last day." John 6:35-40
Jesus, the Bread of Life, came to us in the "house of bread" so that we can feed on Him and live!