This empirical paper investigates the impact of different sources of increasing returns on firm innovative behaviour in different regions of the uk. Of the different sources of increasing returns, the impact of intermediation and the emergence of specialised markets on the probability of innovation is of particular interest to this analysis. The existing literature on regional development in the uk strongly suggests that the south east has many features that may characterise an economy growing with a greater division of labour. These are less evident in the industrial heartland region of northern england. Other influences on innovation such as the impact of regional public r&d and dynamic economies to scale due to learning within a firm are also considered.