This paper provides an update of an earlier study undertaken by one of the
authors and extends the analysis by modelling the determinants of rates of
return, using an appropriate cointegration based approach. A second major e
xtension was to test formally whether rates of return have been converging
over time. The results from testing for convergence show that there is litt
le evidence of catch-lip, either because long-am convergence already existe
d during this period, or because there was divergence (away from the East A
nglia/South East region). With regard to what determines rates of return, t
he peripheral regions were generally more responsive to changes in total fa
ctor productivity than were the 'southern' regions. Similarly, 'capital dee
pening' resulted in larger responses in the peripheral regions. In contrast
, the impact of a change in labour's shale in value-added on rates of retur
n had no obvious spatial pattern. Our results also indicated that the large
st source of interregional differences in rates of return was regional diff
erences in the underlying determinants, rather than differences in model el
asticities per se. Of the changes in the underlying determinants, increases
in capital deepening over the period were predominant.