©　Palgrave　Macmillan,　a　division　of　Macmillan　Publishers　Limited　2010.　Over　the　past　three　decades,　China’s　economic　miracle　has　featured　an　open-door　policy,　most　notably　in　the　absorption　of　foreign　capital.　One　of　the　downside　effects　of　economic　reform,　however,　has　been　ever-rising　inter-regional　inequality.　As　foreign　direct　investment　(FDI)　is　distributed　unevenly　across　regions,　many　scholars　and　policymakers　have　blamed　inflows　of　FDI　as　one　of　the　main　factors　in　driving　the　Chinese　regions　apart.　By　this　logic,　controlling　the　scale　of　FDI　could　be　a　solution　to　regional　inequality;　however,　it　is　difficult　to　reconcile　the　positive　effect　of　FDI　on　economic　growth　with　the　potentially　ʼnegative’　effect　on　regional　inequality.　This　is　a　controversial　and　provocative　issue　in　developmental　economic　literature.　Using　the　largest　panel　dataset　covering　all　the　Chinese　regions　over　the　period　1979-003　and　employing　an　augmented　Cobb-Douglas　production　function,　this　chapter　provides　evidence　that　FDI　has　been　an　important　factor　responsible　for　regional　growth　differences　in　China.　However,　it　suggests　that　FDI　cannot　be　blamed　for　causing　regional　inequality;　it　is　the　uneven　distribution　of　FDI　instead　of　FDI　itself　that　has　caused　regional　growth　differences.　The　key　policy　issue　is　that　FDI　should　be　guided　towards　inland　areas　with　preferential　policies　implemented　in　order　to　improve　the　spatial　allocation　of　investments　as　a　means　to　reduce　regional　inequality.