This paper proposes an explanation of the historical success of indust
rial enterprises owned by township and village governments in China. I
argue that conditions peculiar to China's prereform economy fostered
the growth of a skilled workforce and high savings, created unusual ma
rket niches, and encouraged entrepreneurial undertakings by local poli
tical elites, especially in areas adjacent to certain cities. I then d
iscuss the allocative and technical efficiency of local public enterpr
ises in China from a theoretical standpoint, and review some relevant
econometric findings. Finally, I consider proposals for reform of town
and village enterprise (TVE) ownership, and discuss the possible adva
ntages of cooperative forms. (C) 1997 Elsevier Science Ltd.