diff --git a/lib/install/deps.js b/lib/install/deps.js
index dfe30b6c0f38c..3d8b333c64441 100644
--- a/lib/install/deps.js
+++ b/lib/install/deps.js
@@ -203,10 +203,15 @@ function removeObsoleteDep (child, log) {
 function packageRelativePath (tree) {
   if (!tree) return ''
   var requested = tree.package._requested || {}
-  var isLocal = requested.type === 'directory' || requested.type === 'file'
-  return isLocal ? requested.fetchSpec
-    : (tree.isLink || tree.isInLink) && !preserveSymlinks() ? tree.realpath
-      : tree.path
+  if (requested.type === 'directory') {
+    return requested.fetchSpec
+  } else if (requested.type === 'file') {
+    return path.dirname(requested.fetchSpec)
+  } else if ((tree.isLink || tree.isInLink) && !preserveSymlinks()) {
+    return tree.realpath
+  } else {
+    return tree.path
+  }
 }
 
 function matchingDep (tree, name) {
diff --git a/test/tap/install-dep-classification.js b/test/tap/install-dep-classification.js
index 2775c367b0002..257fc99fc123f 100644
--- a/test/tap/install-dep-classification.js
+++ b/test/tap/install-dep-classification.js
@@ -23,18 +23,39 @@ const env = common.newEnv().extend({
   npm_config_loglevel: 'error'
 })
 
+/**
+ * NOTE: Tarball Fixtures
+ * They contain package.json files with dependencies like the following:
+ * a-1.0.0.tgz: package/package.json
+ * {
+ *   "name":"a",
+ *   "version":"1.0.0",
+ *   "dependencies":{
+ *     "b":"./b-1.0.0.tgz"
+ *   }
+ * }
+ * example-1.0.0.tgz: package/package.json
+ * {
+ *   "name":"example",
+ *   "version":"1.0.0",
+ *   "dependencies":{
+ *     "a":"./a-1.0.0.tgz",
+ *     "b":"./b-1.0.0.tgz"
+ *   }
+ * }
+ */
 const fixture = new Tacks(Dir({
   cache: Dir(),
   global: Dir(),
   tmp: Dir(),
   testdir: Dir({
     'a-1.0.0.tgz': File(Buffer.from(
-      '1f8b0800000000000003edcfc10e82300c0660ce3ec5d2b38e4eb71d789b' +
-      '010d41e358187890f0ee56493c71319218937d977feb9aa50daebab886f2' +
-      'b0a43cc7ce671b4344abb558ab3f2934223b198b4a598bdcc707a38f9c5b' +
-      '0fb2668c83eb79946fff597611effc131378772528c0c11e6ed4c7b6f37c' +
-      '53122572a5a640be265fb514a198a0e43729f3f2f06a9043738779defd7a' +
-      '89244992e4630fd69e456800080000',
+      '1f8b0800000000000003edcfc10a83300c06e09df71492f35653567bf06d' +
+      'a2067163b558b7c3c4775f54f0e4654c18837e973f4da0249eca1bd59cfa' +
+      '25d535b4eeb03344b4c6245bfd8946995d328b5a5b3bd55264464beebdc8' +
+      '9647e8a99355befd67b92559f34f0ce0e8ce9003c1099edc85a675f2d20a' +
+      '154aa762cfae6257361c201fa090994a8bf33c577dfd82713cfefa86288a' +
+      'a2e8736f68a0ff4400080000',
       'hex'
     )),
     'b-1.0.0.tgz': File(Buffer.from(
@@ -55,12 +76,12 @@ const fixture = new Tacks(Dir({
       })
     }),
     'example-1.0.0.tgz': File(Buffer.from(
-      '1f8b0800000000000003ed8fc10ac2300c8677f62946cedaa5d8f5e0db64' +
-      '5b1853d795758a38f6ee4607e261370722f4bbfce5cb4f493c9527aa39f3' +
-      '73aa63e85cb23288688d4997fc136d304df6b945adad45e9c923375a72ed' +
-      '4596b884817a59e5db7fe65bd277fe0923386a190ec0376afd99610b57ee' +
-      '43d339715aa14231157b7615bbb2e100871148664a65b47b15d450dfa554' +
-      'ccb2f890d3b4f9f57d9148241259e60112d8208a00080000',
+      '1f8b0800000000000003ed8fc10a83300c863def2924e7ada6587bf06daa' +
+      '06719bb55837c6c4775fa6307670a70963d0ef92f02584fcce94275353e2' +
+      '962a8ebeb3d1c620a2562a5ef34f64aae328cd344aa935f21e379962875b' +
+      '3fb2c6c50fa6e757bebdb364895ff54f18c19a962007ba99d69d09f670a5' +
+      'de379d6527050a645391235b912d1bf2908f607826127398e762a8efbc53' +
+      'ccae7873d3b4fb75ba402010087ce2014747c9d500080000',
       'hex'
     )),
     optional: Dir({
diff --git a/test/tap/install-local-from-local.js b/test/tap/install-local-from-local.js
new file mode 100644
index 0000000000000..ec53c74a39206
--- /dev/null
+++ b/test/tap/install-local-from-local.js
@@ -0,0 +1,94 @@
+'use strict'
+var path = require('path')
+var fs = require('graceful-fs')
+var test = require('tap').test
+var common = require('../common-tap.js')
+var Tacks = require('tacks')
+var Dir = Tacks.Dir
+var File = Tacks.File
+
+var testdir = path.join(__dirname, path.basename(__filename, '.js'))
+var cwd = path.join(testdir, '3')
+
+/**
+ * NOTE: Tarball Fixtures
+ * They contain package.json files with dependencies like the following:
+ * 1-1.0.0.tgz: package/package.json
+ * {
+ *   "name":"1",
+ *   "version":"1.0.0"
+ * }
+ * 2-1.0.0.tgz: package/package.json
+ * {
+ *   "name":"2",
+ *   "version":"1.0.0",
+ *   "dependencies":{
+ *     "1":"file:../1/1-1.0.0.tgz"
+ *   }
+ * }
+ */
+var fixture = new Tacks(Dir({
+  '1': Dir({
+    '1-1.0.0.tgz': File(Buffer.from(
+      '1f8b08000000000000032b484cce4e4c4fd52f80d07a59c5f9790c540606' +
+      '06066626260ad8c4c1c0d85c81c1d8d4ccc0d0d0cccc00a80ec830353103' +
+      'd2d4760836505a5c925804740aa5e640bca200a78708a856ca4bcc4d55b2' +
+      '523254d2512a4b2d2acecccf03f1f40cf40c946ab906da79a360148c8251' +
+      '300a6804007849dfdf00080000',
+      'hex'
+    ))
+  }),
+  '2': Dir({
+    '2-1.0.0.tgz': File(Buffer.from(
+      '1f8b0800000000000003ed8f3d0e83300c8599394594b90d36840cdc2602' +
+      '17d19f80087468c5ddeb14a9135b91aa4af996e73c3f47f660eb8b6d291b' +
+      '565567dfbb646700c0682db6fc00ea5c24456900d118e01c17a52e58f75e' +
+      '648bd94f76e455befd67bd457cf44f78a64248676f242b21737908cf3b8d' +
+      'beeb5d70508182d56d6820d790ab3bf2dc0a83ec62489dba2b554a6598e1' +
+      'f13da1a6f62139b0a44bfaeb0b23914824b2c50b8b5b623100080000',
+      'hex'
+    ))
+  }),
+  '3': Dir({
+    'package.json': File({
+      name: '3',
+      version: '1.0.0',
+      dependencies: {
+        '2': '../2/2-1.0.0.tgz'
+      }
+    })
+  })
+}))
+
+function setup () {
+  fixture.create(testdir)
+}
+
+function cleanup () {
+  fixture.remove(testdir)
+}
+
+test('setup', function (t) {
+  cleanup()
+  setup()
+  t.end()
+})
+
+test('installing local package with local dependency', function (t) {
+  common.npm(
+    ['install'],
+    {cwd: cwd},
+    function (er, code, stdout, stderr) {
+      t.is(code, 0, 'no error code')
+      t.is(stderr, '', 'no error output')
+      t.ok(fs.existsSync(path.join(cwd, 'node_modules', '2')), 'installed direct dep')
+      t.ok(fs.existsSync(path.join(cwd, 'node_modules', '1')), 'installed indirect dep')
+      t.end()
+    }
+  )
+})
+
+test('cleanup', function (t) {
+  cleanup()
+  t.end()
+})