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Osteoarthritis (OA) is a degenerative disease of the joints for which no curative treatment exists. Intra-articular injection of stem cells is explored as a regenerative approach, but rapid clearance of cells from the injection site limits the therapeutic outcome. Microencapsulation of mesenchymal stem cells (MSCs) can extend the retention time of MSCs, but the outcomes of the few studies currently performed are conflicting. We hypothesize that the composition of the micromaterial's shell plays a deciding factor in the treatment outcome of intra-articular MSC injection. To this end, we microencapsulate MSCs using droplet microfluidic generators in flow-focus mode using various polymers and polymer concentrations. We demonstrate that polymer composition and concentration potently alter the metabolic activity as well as the secretome of MSCs. Moreover, while microencapsulation consistently prolongs the retention time of MSC injected in rat joints, distinct biodistribution within the joint is demonstrated for the various microgel formulations. Furthermore, intra-articular injections of pristine and microencapsulated MSC in OA rat joints show a strong material-dependent effect on the reduction of cartilage degradation and matrix loss. Collectively, this study highlights that micromaterial composition and concentration are key deciding factors for the therapeutic outcome of intra-articular injections of microencapsulated stem cells to treat degenerative joint diseases.