Prior research on entrepreneurial orientation (EO) has substantially advanced our understanding of EO and firm performance. However, the underlying mechanism of the specific aspects of EO and firm growth remain unexplored. This study investigates the relationship between EO, a firm's boundary decision, and firm growth. When firms aim to grow, their boundary decisions consist of decisions regarding internal, external, and collaborative expansion. Among the various types of collaborative expansion strategies, franchising is popular in the restaurant industry. This study explores how a firm's boundary decision on either internal expansion or franchising affects the firm's growth rate; EO affects both a knowledge transfer system and the firm's boundary decision. From the responses of 161 restaurant firms, I analyze these effects using structural equation modeling. The findings are as follows. First, proactiveness and risk-taking have positive and negative effects on efficient knowledge transfer respectively. This result implies that firms with strong proactiveness and/ or risk aversion seek to establish efficient knowledge transfer systems. Second, an efficient knowledge system has positive effects on adopting franchising strategy. Franchising systems enable inexperienced individuals to operate restaurants in a short time—this characteristic requires efficient knowledge transfer between franchisees and the franchisor. Third, franchising has positive effects on the growth rate of firms. This result supports prior franchising research findings that firms can overcome managerial limits to firm growth through the franchising strategy. The findings suggest that investigating role of a firm's boundary decision and knowledge transfer system enhances the understanding of the relationship between EO and the firm growth rate.
