In this paper, we try to evaluate the impact of FDI inflows, on domestic wage inequality within industry sector in the Egyptian economy through learning process as technology transfer from foreign firms to domestic firms. Based on a model of the impact of new technologies on wage inequality developed by Aghion and Howitt (1998). Following Figini and Görg (1999); and Figini and Go¨ rg (2011) models for Ireland, and some selected developing and developed countries respectively.
In the econometric analysis we use Theil index as a proxy for wage inequality in industry sector in our VAR model for time series data over the period 1975-2014. According to the VIF test and the existence of the multicollinearity, we can not check from non-linear relationship between Theil index (wage inequality) and FDI inflows within the industry sector, However, we check from linear relationship between Theil index and FDI using VAR in difference model, which is suitable and useful model, when the variables included in the model are not exogenous. Our results indicate that, a one per cent increase of FDI results in a decrease of income inequality (Theil index) by 0.000113. which indicate that domestic firms may learning from foreign firms.