T.,
I think it's a personal preference. Mine is that when they get old enough to talk about their friends a lot (about age 3) that they get approximately one friend per year of age invited to their party. I invite parents, too, until they are school aged.
I don't do any competitive games until they are about 6. Kids get overexcited with birthday parties anyway. Having competitions for small children is usually too much and ends up with fights, tantrums and tears. Craft tables, sand boxes, and kiddie pools (if you have an adult to watch every child) is great. Let kids just roam and do what they want. Structured parties with stations or schedules are appropriate for school aged children. If you let your child open presents in front of the other kids, it's best to unwrap, thank, and put it out of sight. If you leave presents out or open and set them up, it's another invitation for fights and tantrums. ("I brought that present so it's mine" or "I was given that present and I don't want to share it.")
The other thing to remember is that you are setting a precedence. Whatever you choose to do this year, there will be an expectation to repeat (or trump) it next year. And if you choose to have more children in your family, it will be a repeat or trump multiple times per year.
Good luck,
S.