Persistence of unemployment of labour is a disconcerting feature of the developing countries. The explanation of unemployment as a general equilibrium phenomenon depends on the type of labour, unskilled or skilled, under consideration. While the general contention of the celebrated Harris and Todaro (Am Econ Rev 60:126–142, 1970) model is that any policy aiming at the urban sector aggravates the unemployment problem, the analysis in the initial part of this chapter based on a three-sector general model with Fields’ type search unemployment suggests the possibility of a trade-off between the government’s twin objectives of growth with foreign capital and mitigation of the unemployment problem. The second part of this chapter is devoted towards examining the consequences of FDI in different sectors of a developing economy with both skilled and unskilled unemployment. It finds that FDI may improve the unemployment of either type of labour. Moreover, FDI in the primary export sector also improves national welfare while foreign capital inflows in the nonagricultural sectors may worsen welfare. The results shed some new light on the long-standing policy debate on foreign direct investment and justify the desirability of FDI flow in the primary export sector from the perspective of both unemployment and social welfare.