diff --git a/desktop/pkg-lib/package.json b/desktop/pkg-lib/package.json
index 6a433846e..270774260 100644
--- a/desktop/pkg-lib/package.json
+++ b/desktop/pkg-lib/package.json
@@ -9,8 +9,8 @@
   "license": "MIT",
   "bugs": "https://github.com/facebook/flipper/issues",
   "dependencies": {
-    "fs-extra": "^8.1.0",
     "flipper-babel-transformer": "0.47.0",
+    "fs-extra": "^8.1.0",
     "metro": "^0.59.0",
     "metro-minify-terser": "^0.59.0"
   },
@@ -18,8 +18,10 @@
     "@types/fs-extra": "^8.1.0",
     "@types/jest": "^25.1.0",
     "@types/node": "^13.7.5",
+    "flipper-test-utils": "0.47.0",
     "globby": "^10",
     "jest": "^25.1.0",
+    "mock-fs": "^4.12.0",
     "prettier": "^2.0.0",
     "rimraf": "^3.0.2",
     "ts-jest": "^26.0.0",
diff --git a/desktop/pkg-lib/src/__tests__/getWatchFolders.node.ts b/desktop/pkg-lib/src/__tests__/getWatchFolders.node.ts
new file mode 100644
index 000000000..ed886c641
--- /dev/null
+++ b/desktop/pkg-lib/src/__tests__/getWatchFolders.node.ts
@@ -0,0 +1,111 @@
+/**
+ * Copyright (c) Facebook, Inc. and its affiliates.
+ *
+ * This source code is licensed under the MIT license found in the
+ * LICENSE file in the root directory of this source tree.
+ *
+ * @format
+ */
+
+import mockfs from 'mock-fs';
+import path from 'path';
+import {consoleMock, normalizePath} from 'flipper-test-utils';
+import getWatchFolders from '../getWatchFolders';
+import fs from 'fs-extra';
+
+describe('getWatchFolders', () => {
+  const realConsole = global.console;
+  global.console = consoleMock as any;
+
+  afterAll(() => {
+    global.console = realConsole;
+  });
+
+  beforeEach(() => {});
+
+  afterEach(() => {
+    mockfs.restore();
+  });
+
+  test('getWatchFolders correctly resolves symlinked packages', async () => {
+    const rootDir =
+      process.platform === 'win32' ? 'C:\\test\\root' : '/test/root';
+    const files = {
+      [rootDir]: {
+        node_modules: {
+          installed_module_1: {},
+          local_module_1: mockfs.symlink({path: '../local_module_1'}),
+          local_module_2: mockfs.symlink({path: '../local_module_2'}),
+          plugin_module_1: mockfs.symlink({path: '../plugins/plugin_module_1'}),
+          plugin_module_2: mockfs.symlink({path: '../plugins/plugin_module_2'}),
+          fb_plugin_module_1: mockfs.symlink({
+            path: '../plugins/fb/fb_plugin_module_1',
+          }),
+          fb_plugin_module_2: mockfs.symlink({
+            path: '../plugins/fb/fb_plugin_module_2',
+          }),
+        },
+        local_module_1: {
+          'package.json': '{"dependencies": {"installed_module_1": "1.0.0"}}',
+        },
+        local_module_2: {
+          'package.json':
+            '{"dependencies": {"fb_plugin_module_1": "1.0.0", "plugin_module_1": "1.0.0"}}',
+        },
+        plugins: {
+          plugin_module_1: {
+            'package.json': '{"dependencies": {"local_module_2": "1.0.0"}}',
+          },
+          plugin_module_2: {
+            'package.json': '{"dependencies": {"fb_plugin_module_1": "1.0.0"}}',
+          },
+          fb: {
+            node_modules: {
+              installed_module_2: {},
+            },
+            fb_plugin_module_1: {
+              'package.json': '{"dependencies": {"plugin_module_2": "1.0.0"}}',
+            },
+            fb_plugin_module_2: {
+              'package.json': '{"dependencies": {}}',
+            },
+          },
+        },
+      },
+    };
+    mockfs(files);
+    const readJsonMock = async (file: string) => {
+      if (!file.startsWith(rootDir)) {
+        throw new Error('File not found: ' + file);
+      }
+      const parts = file.substring(rootDir.length + 1).split(path.sep);
+      let cur = <any>files[rootDir];
+      for (const part of parts) {
+        cur = cur[part];
+        if (!cur) {
+          throw new Error(`File part "${part}" not found: ${file}`);
+        }
+      }
+      return JSON.parse(cur);
+    };
+    const readReadJson = fs.readJson;
+    try {
+      fs.readJson = <any>readJsonMock;
+      const resolvedFolders = await getWatchFolders(
+        path.join(rootDir, 'local_module_2'),
+      );
+      expect(resolvedFolders.map(normalizePath)).toMatchInlineSnapshot(`
+        Array [
+          "/test/root/local_module_2",
+          "/test/root/node_modules",
+          "/test/root/plugins/fb/fb_plugin_module_1",
+          "/test/root/plugins/fb/node_modules",
+          "/test/root/plugins/plugin_module_1",
+          "/test/root/plugins/plugin_module_2",
+        ]
+      `);
+    } finally {
+      fs.readJson = readReadJson;
+    }
+  });
+});
diff --git a/desktop/pkg-lib/src/getWatchFolders.ts b/desktop/pkg-lib/src/getWatchFolders.ts
index 8d9140e03..0f6ffb8a3 100644
--- a/desktop/pkg-lib/src/getWatchFolders.ts
+++ b/desktop/pkg-lib/src/getWatchFolders.ts
@@ -10,33 +10,55 @@
 import fs from 'fs-extra';
 import path from 'path';
 
+// This function searches all the folders which can be used to
+// resolve dependencies for package located in "packageDir", including
+// all its transitive dependencies. It scans all the parent directories
+// up the file tree and grabs all "node_modules" inside these directories.
+// Aditionally, it resolves all the symlinks found in any of these "node_modules"
+// directories and repeat the same process for each resolved target directory.
 export default async (packageDir: string): Promise<string[]> => {
   if (!(await fs.pathExists(packageDir))) {
     return [];
   }
-  const watchDirs: string[] = [packageDir];
-  const pkg = await fs.readJson(path.join(packageDir, 'package.json'));
-  while (true) {
-    const nodeModulesDir = path.join(packageDir, 'node_modules');
-    if (await fs.pathExists(nodeModulesDir)) {
-      watchDirs.push(nodeModulesDir);
-      const modules = await fs.readdir(nodeModulesDir);
-      for (const moduleName of modules) {
-        if (pkg.dependencies && pkg.dependencies[moduleName]) {
-          const fullPath = path.join(nodeModulesDir, moduleName);
-          const stat = await fs.lstat(fullPath);
-          if (stat.isSymbolicLink()) {
-            const target = await fs.readlink(fullPath);
-            watchDirs.push(path.resolve(nodeModulesDir, target));
+  const packagesToProcess = [packageDir];
+  const processedPackages = new Set<string>();
+  processedPackages.add(packageDir);
+  const watchDirs = new Set<string>();
+  while (packagesToProcess.length > 0) {
+    let currentDir = packagesToProcess.shift() as string;
+    watchDirs.add(currentDir);
+    const {dependencies} = await fs.readJson(
+      path.join(currentDir, 'package.json'),
+    );
+    const dependenciesSet = new Set<string>(Object.keys(dependencies ?? {}));
+    while (dependenciesSet.size > 0) {
+      const nodeModulesDir = path.join(currentDir, 'node_modules');
+      if (await fs.pathExists(nodeModulesDir)) {
+        watchDirs.add(nodeModulesDir);
+        for (const moduleName of dependenciesSet) {
+          const fullModulePath = path.join(nodeModulesDir, moduleName);
+          if (await fs.pathExists(fullModulePath)) {
+            dependenciesSet.delete(moduleName);
+            const stat = await fs.lstat(fullModulePath);
+            if (stat.isSymbolicLink()) {
+              const targetDir = await fs.readlink(fullModulePath);
+              const absoluteTargetDir = path.isAbsolute(targetDir)
+                ? targetDir
+                : path.resolve(nodeModulesDir, targetDir);
+              if (!processedPackages.has(absoluteTargetDir)) {
+                packagesToProcess.push(absoluteTargetDir);
+                processedPackages.add(absoluteTargetDir);
+              }
+            }
           }
         }
       }
+      const parentDir = path.dirname(currentDir);
+      if (!parentDir || parentDir === '/' || parentDir === currentDir) {
+        break;
+      }
+      currentDir = parentDir;
     }
-    const nextDir = path.dirname(packageDir);
-    if (!nextDir || nextDir === '/' || nextDir === packageDir) {
-      break;
-    }
-    packageDir = nextDir;
   }
-  return watchDirs;
+  return [...watchDirs];
 };