Microdroplets and microcapsules have been widely produced using microfluidic flow-focusing junctions for biomedical and chemical applications. However, the multiphase microfluidic flow at the flow-focusing junction has not been well investigated. In this study, the displacement of two (core and shell) aqueous fluids that disperse into droplets altogether in a carrier oil emulsion was investigated both numerically and experimentally. It was found that extensive displacement of the two aqueous fluids within the droplet during its formation could occur as a result of the shear effect of the carrier fluid and the capillary effect of interfacial tension. We further identified that the two mechanisms of fluid displacement can be evaluated by two dimensionless parameters. The quantitative relationship between the degree of fluid displacement and these two dimensionless parameters was determined experimentally. Finally, we demonstrated that the degree of fluid displacement could be controlled to generate hydrogel microparticles of different morphologies using planar or nonplanar flow-focusing junctions. These findings should provide useful guidance to the microfluidic production of microscale droplets or capsules for various biomedical and chemical applications.