YBa2Cu3O7-x (YBCO) films grown by pulsed laser deposition (PLD) on (100) LaAlO3 (LAO) substrates show a strong thickness dependence on the electrical properties. For example, for films in excess of 0.3 μm, the critical current density decreases with increasing thickness. In contrast, nano-composite films consisting of a series of multiple layers of YBa2Cu3O7-x and (Ba0.05, Sr0.95)TiO3 (BSTO) thin films having a total thickness of 5 μm show improved electrical properties. In order to understand this phenomenon, a detailed microstructural characterization has been undertaken. Transmission electron microscopy (TEM) observations show that cracks, stacking faults, c-║ crystals and secondary phase precipitates are present on the single-layer films, while a high-quality microstructure is observed for the nanocomposite multiple-layer films although defects at YBCO/BSTO interface are still present. In addition, nanocomposite films have a reduced surface roughness. In this complex microstructure, the YBCO/BSTO interfaces and the lattice mismatch strain play a crucial role in controlling the nature of the defects and stability of phases. In order to understand the role of the BSTO layer has on the microstructure, the interfacial mismatch strain and defects are analyzed by high-resolution transmission electron microscopy (HRTEM) in combination with the Moiré fringe technique.