We present a new technique for hierarchical intellectual property (IP) protection using partially-mergeable cores. The proposed core partitioning technique guarantees 100% protection of critical-IP, while simplifying test generation for the logic that is merged with the system. Since critical-IP is tested using BIST, the controllability and observability of internal lines in the core are enhanced, and test application time is reduced. Case studies using the ISIT-DLX and Picojava processor cores demonstrate the applicability of our technique.