Rates of Return on Plant and Machinery in the Regions of the UK, 1968‐1991

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 extension was to test formally whether rates of return have been converging over time. The results from testing for convergence show that there is little evidence of catch‐up, either because long‐run convergence already existed during this period, or because there was divergence (away from the East Anglia\South East region). With regard to what determines rates of return, the peripheral regions were generally more responsive to changes in total factor productivity than were the ‘southern’ regions. Similarly, ‘capital deepening’ resulted in larger responses in the peripheral regions. In contrast, the impact of a change in labour’s share in value‐added on rates of return had no obvious spatial pattern. Our results also indicated that the largest source of interregional differences in rates of return was regional differences in the underlying determinants, rather than differences in model elasticities per se. Of the changes in the underlying determinants, increases in capital deepening over the period were predominant.