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The option to check/uncheck "use as two-way player" is found under "set game strategy". To get there, find the player in your lineup/pitching staff and right click them, click "set game strategy" then the checkbox you are looking for will be on the lower right.
I can only guess, but I feel that if they can play two ways then I will play them two ways. The only time a starting pitcher would be out of the lineup is when he starts so if you feel that you want that extra game every 5 days then go ahead and make him a position player only. Conversely, if you feel that he's best off pitching only either in the rotation or in the bullpen, you can make him just a pitcher.
I'm not certain on the development effects however. My gut would be to play the player as a two-way if they can produce, so long as they aren't fragile.
Hope this helps!
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