|This paper investigates local vertical linkages of foreign subsidiaries and the dual role of such linkages as conduits for learning as well as potential channels for spillovers to competitors. On the basis of data from 97 subsidiaries we analyze the quality of such linkages under varying levels of competition and subsidiary capabilities. We find a curvilinear relationship between the extent of competitive pressure and the quality of local linkages confirming our theory of a trade-off between learning prospects and spillover risks. Furthermore, the extent to which a subsidiary possesses capabilities moderates this relationship. Our theoretical development and the results from the analysis imply a far more complex and dynamic relationship between MNCs’ local participation in knowledge intensive activities and levels of competition than previous studies.