Buzhong Yiqi decoction (BYD) is a well-known ancient tonic prescription in traditional Chinese medicine (TCM). The purpose of this study is to identify active components of BYD involved in promoting proliferation of mesenchymal stem cells (MSCs) and to investigate its mechanism. BYD was extracted with petroleum ether, ethanol, and water. Evidence provided by 3-(4,5-dimethylthiazol-2-yl)-2,5-diphenyltetrazolium bromide, bromodeoxyuridine, proliferation cell nuclear antigen immunoreactivity, cell cycle analysis, and gas chromatography-mass spectrometry indicated that hexadecanoic acid (HA) in BYD extracted with petroleum ether is the active compound responsible for increasing proliferation of MSCs. Western blot analysis show that HA significantly increase retinoic acid receptor (RAR) levels of MSCs, but not estrogen receptor, thyroid hormone receptor, vitamin D receptor, glucocorticoid receptor, and peroxisome proliferator-activated receptor. Reverse transcription-polymerase chain reaction revealed that HA significantly increased RAR mRNA levels. Furthermore, the mechanism of HA action depends on RAR pathway and up-regulates expression of mRNA for insulin-like growth factor-I, the target gene of RAR. Our findings have now allowed for a refinement in our understanding of TCM with respect to pharmacological regulation of stem cells and may be useful to stem cell biology and therapy.