Drug delivery systems such as microspheres have shown potential in releasing biologicals effectively for tissue engineering applications. Microfluidic systems are especially attractive for generating microspheres as they produce microspheres of controlled-size and in low volumes, using micro-emulsion processes. However, the flow rate dependency on the encapsulation of molecules at a microscale is poorly understood. In particular, the flow rate and pressure parameters might influence the droplet formation and drug encapsulation efficiency. We evaluated the parameters within a two-reagent flow focusing microfluidic chip under continuous formation of hydrogel particles using a flourinated oil and an ionic crosslinkable alginate hydrogel. Fluorescein isothiocyanate-dextran sulfate (FITC-dextran sulfate MW: 40 kDa) was used to evaluate the variation of the encapsulation efficiency with the flow parameters, optimizing droplets and microsphere formation. The ideal flow rates allowing for maximum encapsulation efficiency, were utilised to form bioactive microspheres by delivering transforming growth factor beta-3 (TGFβ-3) in cell culture media. Finally, we evaluated the potential of microfluidic-formed microspheres to be included within biological environments. The biocompatibility of the microspheres was tested over 28 days using adult human mesenchymal stem cells (hMSCs). The release profile of the growth factors from microspheres showed a sustained release in media, after an initial burst, up to 30 days. The metabolic activity of the cells cultured in the presence of the microspheres was similar to controls, supporting the biocompatibility of this approach. The fine-tuned parameters for alginate hydrogel to form microspheres have potential in encapsulating and preserving functional structure of bioactive agents for future tissue engineering applications.