diff --git a/lib/component.js b/lib/component.js
old mode 100644
new mode 100755
index ec4c057c..b5020569
--- a/lib/component.js
+++ b/lib/component.js
@@ -38,7 +38,7 @@ exports.lookup = function(pkg, paths){
   debug('lookup %s', pkg);
   for (var i = 0; i < paths.length; ++i) {
     var path = join(paths[i], pkg);
-    debug('check %s', path);
+    debug('check %s', join(path, 'component.json'));
     if (exists(join(path, 'component.json'))) {
       debug('found %s', path);
       return path;
@@ -66,8 +66,13 @@ exports.dependenciesOf = function(pkg, paths, parent){
   var conf = require(resolve(path, 'component.json'));
   var deps = [conf.dependencies || {}];
   if (conf.local) {
+    var lookupPaths = conf.paths || [];
+    lookupPaths = lookupPaths.map(function (relPath){
+      return join(path, relPath);
+    });
     conf.local.forEach(function(dep){
-      deps = deps.concat(exports.dependenciesOf(dep, paths, pkg));
+      //append root paths to relative paths of the dependency for backward compatibility
+      deps = deps.concat(exports.dependenciesOf(dep, paths.concat(lookupPaths), pkg));
     });
   }
   return deps;
diff --git a/test/fixtures/local/component.json b/test/fixtures/local/component.json
new file mode 100644
index 00000000..fb78ce18
--- /dev/null
+++ b/test/fixtures/local/component.json
@@ -0,0 +1,16 @@
+{
+  "name": "local",
+  "description": "Main component with local dependency chain",
+  "version": "0.0.1",
+  "dependencies": {},
+  "local": [
+    "direct"
+  ],
+  "paths": [
+    "./"
+  ],
+  "main": "index.js",
+  "scripts": [
+    "index.js"
+  ]
+}
diff --git a/test/fixtures/local/direct/component.json b/test/fixtures/local/direct/component.json
new file mode 100644
index 00000000..28ad7897
--- /dev/null
+++ b/test/fixtures/local/direct/component.json
@@ -0,0 +1,17 @@
+{
+  "name": "direct",
+  "description": "Local component dependency for main application",
+  "version": "0.0.1",
+  "dependencies": {},
+  "local": [
+    "first",
+    "second"
+  ],
+  "paths": [
+    "../others"
+  ],
+  "main": "index.js",
+  "scripts": [
+    "index.js"
+  ]
+}
diff --git a/test/fixtures/local/direct/index.js b/test/fixtures/local/direct/index.js
new file mode 100644
index 00000000..82f3c01d
--- /dev/null
+++ b/test/fixtures/local/direct/index.js
@@ -0,0 +1,4 @@
+var first = require('first');
+var second = require('second');
+
+module.exports = first + second;
diff --git a/test/fixtures/local/index.js b/test/fixtures/local/index.js
new file mode 100644
index 00000000..09199a39
--- /dev/null
+++ b/test/fixtures/local/index.js
@@ -0,0 +1,2 @@
+var direct = require('direct');
+console.log(direct);
diff --git a/test/fixtures/local/others/first/component.json b/test/fixtures/local/others/first/component.json
new file mode 100644
index 00000000..630d3e92
--- /dev/null
+++ b/test/fixtures/local/others/first/component.json
@@ -0,0 +1,12 @@
+{
+  "name": "first",
+  "description": "Local dependency of a local component",
+  "version": "0.0.1",
+  "dependencies": {
+    "component/overlay": "*"
+  },
+  "main": "index.js",
+  "scripts": [
+    "index.js"
+  ]
+}
diff --git a/test/fixtures/local/others/first/index.js b/test/fixtures/local/others/first/index.js
new file mode 100644
index 00000000..0b5c180d
--- /dev/null
+++ b/test/fixtures/local/others/first/index.js
@@ -0,0 +1 @@
+module.exports = "first";
diff --git a/test/fixtures/local/others/second/component.json b/test/fixtures/local/others/second/component.json
new file mode 100644
index 00000000..d1f15ff0
--- /dev/null
+++ b/test/fixtures/local/others/second/component.json
@@ -0,0 +1,12 @@
+{
+  "name": "second",
+  "description": "Local dependency of a local component",
+  "version": "0.0.1",
+  "dependencies": {
+    "component/emitter": "*"
+  },
+  "main": "index.js",
+  "scripts": [
+    "index.js"
+  ]
+}
diff --git a/test/fixtures/local/others/second/index.js b/test/fixtures/local/others/second/index.js
new file mode 100644
index 00000000..cea3053d
--- /dev/null
+++ b/test/fixtures/local/others/second/index.js
@@ -0,0 +1 @@
+module.exports = "second";
diff --git a/test/install.js b/test/install.js
index a632efb6..83ddec50 100644
--- a/test/install.js
+++ b/test/install.js
@@ -67,8 +67,15 @@ describe('component install', function(){
         done();
       })
     })
-  })
 
+    it('should install dependencies through chain of local dependencies', function(done){
+      exec('cd test/fixtures/local && ../../../bin/component install', function(err, stdout){
+        if (err) return done(err);
+        done();
+      })
+    })
+
+  })
   describe('[name...]', function(){
     it('should install the multiple components', function(done){
       exec('bin/component install component/overlay component/zepto', function(err, stdout){