diff --git a/src/compiler/program.ts b/src/compiler/program.ts
index 49f61981d72..7a4adf9ff08 100644
--- a/src/compiler/program.ts
+++ b/src/compiler/program.ts
@@ -8,8 +8,6 @@ namespace ts {
 
     const emptyArray: any[] = [];
 
-    const defaultTypeRoots = ["node_modules/@types"];
-
     export function findConfigFile(searchPath: string, fileExists: (fileName: string) => boolean): string {
         while (true) {
             const fileName = combinePaths(searchPath, "tsconfig.json");
@@ -168,7 +166,7 @@ namespace ts {
 
     const typeReferenceExtensions = [".d.ts"];
 
-    function getEffectiveTypeRoots(options: CompilerOptions, host: ModuleResolutionHost) {
+    function getEffectiveTypeRoots(options: CompilerOptions, host: ModuleResolutionHost): string[] | undefined {
         if (options.typeRoots) {
             return options.typeRoots;
         }
@@ -181,10 +179,33 @@ namespace ts {
             currentDirectory = host.getCurrentDirectory();
         }
 
-        if (!currentDirectory) {
-            return undefined;
+        return currentDirectory && getDefaultTypeRoots(currentDirectory, host);
+    }
+
+    function getDefaultTypeRoots(currentDirectory: string, host: ModuleResolutionHost): string[] | undefined {
+        const nodeModules = getNearestNodeModules(currentDirectory, host);
+        return nodeModules && [combinePaths(nodeModules, "@types")];
+    }
+
+    function getNearestNodeModules(currentDirectory: string, host: ModuleResolutionHost): string | undefined {
+        if (!host.directoryExists) {
+            return combinePaths(currentDirectory, "node_modules");
+            // And if it doesn't exist, tough.
+        }
+
+        while (true) {
+            const nodeModules = combinePaths(currentDirectory, "node_modules");
+            if (host.directoryExists(nodeModules)) {
+                return nodeModules;
+            }
+            else {
+                const parent = getDirectoryPath(currentDirectory);
+                if (parent === currentDirectory) {
+                    return undefined;
+                }
+                currentDirectory = parent;
+            }
         }
-        return map(defaultTypeRoots, d => combinePaths(currentDirectory, d));
     }
 
     /**
diff --git a/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.js b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.js
new file mode 100644
index 00000000000..9e93755d1f0
--- /dev/null
+++ b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.js
@@ -0,0 +1,17 @@
+//// [tests/cases/compiler/typeRootsFromNodeModulesInParentDirectory.ts] ////
+
+//// [index.d.ts]
+
+declare module "xyz" {
+    export const x: number;
+}
+
+//// [a.ts]
+import { x } from "xyz";
+x;
+
+
+//// [a.js]
+"use strict";
+var xyz_1 = require("xyz");
+xyz_1.x;
diff --git a/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.symbols b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.symbols
new file mode 100644
index 00000000000..10cbdaa3c53
--- /dev/null
+++ b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.symbols
@@ -0,0 +1,14 @@
+=== /src/a.ts ===
+import { x } from "xyz";
+>x : Symbol(x, Decl(a.ts, 0, 8))
+
+x;
+>x : Symbol(x, Decl(a.ts, 0, 8))
+
+=== /node_modules/@types/foo/index.d.ts ===
+
+declare module "xyz" {
+    export const x: number;
+>x : Symbol(x, Decl(index.d.ts, 2, 16))
+}
+
diff --git a/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.trace.json b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.trace.json
new file mode 100644
index 00000000000..7782ffc4ebf
--- /dev/null
+++ b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.trace.json
@@ -0,0 +1,39 @@
+[
+    "======== Resolving module 'xyz' from '/src/a.ts'. ========",
+    "Module resolution kind is not specified, using 'NodeJs'.",
+    "Loading module 'xyz' from 'node_modules' folder.",
+    "File '/src/node_modules/xyz.ts' does not exist.",
+    "File '/src/node_modules/xyz.tsx' does not exist.",
+    "File '/src/node_modules/xyz.d.ts' does not exist.",
+    "File '/src/node_modules/xyz/package.json' does not exist.",
+    "File '/src/node_modules/xyz/index.ts' does not exist.",
+    "File '/src/node_modules/xyz/index.tsx' does not exist.",
+    "File '/src/node_modules/xyz/index.d.ts' does not exist.",
+    "File '/src/node_modules/@types/xyz.ts' does not exist.",
+    "File '/src/node_modules/@types/xyz.tsx' does not exist.",
+    "File '/src/node_modules/@types/xyz.d.ts' does not exist.",
+    "File '/src/node_modules/@types/xyz/package.json' does not exist.",
+    "File '/src/node_modules/@types/xyz/index.ts' does not exist.",
+    "File '/src/node_modules/@types/xyz/index.tsx' does not exist.",
+    "File '/src/node_modules/@types/xyz/index.d.ts' does not exist.",
+    "File '/node_modules/xyz.ts' does not exist.",
+    "File '/node_modules/xyz.tsx' does not exist.",
+    "File '/node_modules/xyz.d.ts' does not exist.",
+    "File '/node_modules/xyz/package.json' does not exist.",
+    "File '/node_modules/xyz/index.ts' does not exist.",
+    "File '/node_modules/xyz/index.tsx' does not exist.",
+    "File '/node_modules/xyz/index.d.ts' does not exist.",
+    "File '/node_modules/@types/xyz.ts' does not exist.",
+    "File '/node_modules/@types/xyz.tsx' does not exist.",
+    "File '/node_modules/@types/xyz.d.ts' does not exist.",
+    "File '/node_modules/@types/xyz/package.json' does not exist.",
+    "File '/node_modules/@types/xyz/index.ts' does not exist.",
+    "File '/node_modules/@types/xyz/index.tsx' does not exist.",
+    "File '/node_modules/@types/xyz/index.d.ts' does not exist.",
+    "======== Module name 'xyz' was not resolved. ========",
+    "======== Resolving type reference directive 'foo', containing file '/src/__inferred type names__.ts', root directory '/node_modules/@types'. ========",
+    "Resolving with primary search path '/node_modules/@types'",
+    "File '/node_modules/@types/foo/package.json' does not exist.",
+    "File '/node_modules/@types/foo/index.d.ts' exist - use it as a name resolution result.",
+    "======== Type reference directive 'foo' was successfully resolved to '/node_modules/@types/foo/index.d.ts', primary: true. ========"
+]
\ No newline at end of file
diff --git a/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.types b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.types
new file mode 100644
index 00000000000..532a05fcb87
--- /dev/null
+++ b/tests/baselines/reference/typeRootsFromNodeModulesInParentDirectory.types
@@ -0,0 +1,14 @@
+=== /src/a.ts ===
+import { x } from "xyz";
+>x : number
+
+x;
+>x : number
+
+=== /node_modules/@types/foo/index.d.ts ===
+
+declare module "xyz" {
+    export const x: number;
+>x : number
+}
+
diff --git a/tests/cases/compiler/typeRootsFromNodeModulesInParentDirectory.ts b/tests/cases/compiler/typeRootsFromNodeModulesInParentDirectory.ts
new file mode 100644
index 00000000000..59b7d6a3188
--- /dev/null
+++ b/tests/cases/compiler/typeRootsFromNodeModulesInParentDirectory.ts
@@ -0,0 +1,15 @@
+// @noImplicitReferences: true
+// @traceResolution: true
+// @currentDirectory: /src
+
+// @Filename: /node_modules/@types/foo/index.d.ts
+declare module "xyz" {
+    export const x: number;
+}
+
+// @Filename: /src/a.ts
+import { x } from "xyz";
+x;
+
+// @Filename: /src/tsconfig.json
+{}