The Insert Text by Typing action converts plain (simple) text into keystrokes and then types each of them individually. It only works with characters that can be typed on the keyboard with one or two keystrokes (eg Option-e e usually types é, and Keyboard Maestro can duplicate that typing).
The Insert Text by Typing action is just like typing yourself, permitting characters like tab/return and maintaining the current style in the program into which you are typing, but it is slow for large amounts of text and can't type exotic characters like Emoji.
Use Insert Text by Typing whenever:
You can also optionally choose (v8+) which application to send the typed text to. This allows you to send keystrokes to an application in the background. Note that the system and many applications do not expect to see keystrokes in the background, so how well this solves any given problem will vary depending on the exact circumstances.