Calcium sulfate is in routine clinical use as a bone substitute, offering the benefits of biodegradability, biocompatibility and a long history of use in bone repair. The osteoconductive properties of calcium sulfate may be further improved by doping with strontium ions. Nevertheless, the high degradation rate of calcium sulfate may impede bone healing as substantial material degradation may occur before the healing process is complete. The purpose of this study is to develop a novel composite bone substitute composed of chitosan and strontium-doped α-calcium sulfate hemihydrate in the form of microcapsules, which can promote osteogenesis while matching the natural rate of bone healing. The developed microcapsules exhibited controlled degradation that facilitated the sustained release of strontium ions. In vitro testing showed that the microcapsules had minimal cytotoxicity and ability to inhibit bacterial growth. In vivo testing in a mouse model showed the absence of genetic toxicity and low inflammatory potential of the microcapsules. The novel microcapsules developed in this study demonstrated suitable degradation characteristics for bone repair as well as favourable in vitro and in vivo behaviour, and hold promise for use as an alternative bone substitute in orthopaedic surgery.