Complexity in the spatial organization of human embryonic stem cell (hESC) cultures creates heterogeneous microenvironments (niches) that influence hESC fate. This study demonstrates that the rate and trajectory of hESC differentiation can be controlled by engineering hESC niche properties. Niche size and composition regulate the balance between differentiation‐inducing and ‐inhibiting factors. Mechanistically, a niche size‐dependent spatial gradient of Smad1 signaling is generated as a result of antagonistic interactions between hESCs and hESC‐derived extra‐embryonic endoderm (ExE). These interactions are mediated by the localized secretion of bone morphogenetic protein‐2 (BMP2) by ExE and its antagonist, growth differentiation factor‐3 (GDF3) by hESCs. Micropatterning of hESCs treated with small interfering (si) RNA against GDF3, BMP2 and Smad1, as well treatments with a Rho‐associated kinase (ROCK) inhibitor demonstrate that independent control of Smad1 activation can rescue the colony size‐dependent differentiation of hESCs. Our results illustrate, for the first time, a role for Smad1 in the integration of spatial information and in the niche‐size‐dependent control of hESC self‐renewal and differentiation.