Module not found: Can't resolve 'react' when importing local library with React as peerDependency

Bug report

Describe the bug

So I often develop libraries locally with React as a peer dependency. This, however, apparently doesn't work with next.js out of the box or I guess I am supposed to do some additional plumbing to get it to work?

I assume because this works with normal React apps that this isn't a standard behavior or it should at least be well-documented. It is not nice to spend hours fixing these types of bugs. Part of the reason could be my rollup configuration for the local-module yet it baffles what I should do to fix it.

There has been some similar previous discussion #1244 #3841 yet none seem to provide a satisfying answer what is happening.

To Reproduce

https://github.com/TeemuKoivisto/nextjs-react-not-found

Expected behavior

I expect next.js to find the local-module as it can apparently do it quite well if the library is inside the nextjs-app folder.

Screenshots

System information

• OS: [macOS catalina]
• Version of Next.js: [10.0.3]
• Version of Node.js: [v10.16.0]
• Deployment: [local]

Additional context

Start with the linked reproduction repository and compare its local library setup with the case where the library is inside the Next.js app. Review the related discussions in issues #1244 and #3841; done means the reported peer-dependency case is resolved or the required setup is documented.