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Mesenchymal stem cells (MSC) are promising candidates for use as a biological therapeutic. Since locally injected MSC disappear within a few weeks, we hypothesize that efficacy of MSC can be enhanced by prolonging their presence. Previously, encapsulation in alginate was suggested as a suitable approach for this purpose. We found no differences between the two alginate types, alginate high in mannuronic acid (High M) and alginate high in guluronic acid (High G), regarding MSC viability, MSC immunomodulatory capability, or retention of capsule integrity after subcutaneous implantation in immune competent rats. High G proved to be more suitable for production of injectable beads. Firefly luciferase-expressing rat MSC were used to track MSC viability. Encapsulation in high G alginate prolonged the presence of metabolically active allogenic MSC in immune competent rats with monoiodoacetate-induced osteoarthritis for at least 8 weeks. Encapsulation of human MSC for local treatment by intra-articular injection did not significantly influence the effect on pain, synovial inflammation, or cartilage damage in this disease model. MSC encapsulation in alginate allows for an injectable approach which prolongs the presence of viable cells subcutaneously or in an osteoarthritic joint. Further fine tuning of alginate formulation and effective dosage for might be required in order to improve therapeutic efficacy depending on the target disease.