Different from a new research stream that knowledge transfer may even be used as a strategy tool by firms to impede or slow down competition, and in light of game theory model, this paper finds that: First, the inhouse innovation capability built to reduce production cost can break down the entry barrier erected by the knowledge transfer strategy of firms of developed countries, and can thus virtually be the market entry strategy for the firms of emerging market countries; Second, even facing the competition, the firms of developed countries will transfer knowledge, and the corresponding knowledge transfer strategies are determined by the factors such as the complexity of knowledge and competition intensity, under which the influences of production cost disadvantage may vary according to the level of knowledge transfer; Finally, the characteristics of industry evolution under the different knowledge transfer strategies and its strategic consequences are also analyzed.