This article evaluates the arguments regarding whether the development of township and village enterprises(TVEs) has been successful and whether TVEs can preserve their advantages and become a successful ”third sector.” After examining TVEs in three areas, this paper finds that TVE productivity growth has resulted from input augmentation, technological progress, and technical efficiency. Through a comparison with stateowned enterprises(SOEs), TVEs are found to be more efficient in terms of relative productive efficiency. Furthermore, as the level of urbanization in China is still low, the TVEs can and should continue to develop in order to both pursue urbanization and absorb the abundant surplus labor in rural areas. Thus this paper argues that the transitional role the TVEs have played will not diminish soon. However, along with the changes in the macroeconomic environment in China, TVEs still need more marketoriented reforms, such as ownership reform, to allow their development to be sustainable.