This paper theoretically evaluates the effects of alternative investment policies on sectoral return to capital, sectoral wage rates, output and employment composition, and growth in a developing economy consisting of a vast informal sector in a general equilibrium framework. With formal sector being capital intensive, investment in formal sector causes sectoral rates of return and wages to be equalized in the long run. Though rates of return are equalized with investment in informal sector, formal-informal wage gap continue to exist in the long run. Further, investment in formal sector causes informal sector to shrink, but not vice versa. The paper also highlights existence of ‘turning point’ in growth à la Lewis.