<p>Industrial digital transformation is increasingly practiced in China under substantial government support, yet the theory of industrial digital transformation and the applicability of government support remain largely unexplored in the literature. To fill this gap, we propose a stochastic evolutionary game model that characterizes the complex interactions in strategic decision-making among large enterprises (LEs), small and medium-sized enterprises (SMEs) and governments. Our proposed model reveals that the ideal outcome of government-enterprise collaboration only holds when all stakeholders meet the conditions for incentive compatibility, which challenges the one-size-fits-all approach of government support. Differences in incentive conditions at the industry level contribute to significant heterogeneity in evolutionary outcomes of industrial digital transformation, and result in large scale but imbalanced structure in China’s practice. Moreover, the increase in environmental uncertainty will worsen stakeholders’ conditions for incentive compatibility, thereby hindering the realization of ideal outcome. With the case study based on China’s home appliance industry, we further demonstrate the real-world applications of our proposed model, analyze the important characteristics of stakeholders’ strategic decision-making, and provide managerial insights for better field practices.</p>