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The traditional livestock industry in Inner Mongolia has evolved rapidly in response to social and economic transformations during recent decades, resulting in substantial impacts on the rural economy and livelihoods of pastoralists. Improved understanding of these changes and potential drivers may help foster strategies to sustain the pastoral system of this region. Using long-term climate, social-economic, and livestock (cattle, horses, sheep, and goats) population data from 1970 to 2010, we analyzed the dynamics of the livestock industry and main driving factors in the Xilinhot region—a central part of the Inner Mongolia Grassland. Our results show that the total livestock population increased dramatically in the past four decades, especially during 1987–2010. Livestock composition also changed substantially, with increasing sheep, goat, and cattle populations but a decreasing horse population. Pastoral population growth and land use policy were the primary drivers for livestock dynamics during 1970–2010. Livestock structure became differentiated progressively with changes in land use policy. Also, climate factors had an important influence on livestock production. The current study suggests that sustainable animal husbandry in this region requires government policies that promote ecological urbanization, livestock production efficiency, incentive systems for grassland conservation, and collective action and cooperation for enhancing social capital and resilience.