Poly(butyl methacrylate) nanoparticles encapsulating a silica precursor, tetraethoxysilane (TEOS), were synthesized by a two-step emulsion polymerization process. We show that TEOS remains mostly unreacted inside the nanoparticles in water but acts both as a plasticizer and cross-linker in films cast from the dispersions. The diffusion-enhancing plasticizing effect is dominant at annealing temperatures closer to the glass-transition temperature of the polymer, and sol-gel cross-linking reactions predominate at higher temperatures. By choosing an appropriate annealing temperature, we were able to balance polymer interdiffusion and silica cross-linking to obtain films with good mechanical properties and excellent chemical resistance. The hybrid cross-linked films produced from these novel "smart" nanoparticles can be used in water-borne environmentally friendly coatings for high-performance applications.