The son of a Clydeside shipbuilder and house builder, Watt was born in Greenock, Scotland. At the age of 17 he started a career in Glasgow as a mathematical-instrument maker. Through his shop, opened in 1757, he met many of the scientists at Glasgow University.

In 1764 it occurred to Watt that the Newcomen steam engine, a model of which he had been repairing, wasted a great deal of energy by dissipating the latent heat given up by steam condensing to water. The solution was to build an engine with a separate condenser, so that there was no need to heat and cool the cylinder at each stroke. In 1768 Watt entered into partnership with John Roebuck, who had established an iron foundry, to produce the steam engine but his duties as a land surveyor, taken up in 1766, left him little time to develop this and Roebuck went bankrupt in 1772. A second partnership (1775) with Matthew Boulton proved more productive although it took Watt until 1790 to perfect what became known as the Watt engine.

This engine, throughout its various stages of improvement, was one of the main contributors to the Industrial Revolution. Early reciprocating versions were used for pumping water out of Cornish copper and tin mines. A rotating engine with the sun-and-planet gearing system invented by Watt in 1781 was used in flour mills, cotton mills, and paper mills. An automatic speed control mechanism, the centrifugal governor invented in 1788, was another improvement.

Watt made a great deal of money from the sale of his engines and became accepted into the scientific establishment. He retired from the business of steam-engine manufacture in 1800 and spent his time traveling, working as a consultant, and working on minor inventions in his workshop at home. Watt was the first to use the term horsepower as a unit of power and the watt, a unit of power, was named for him.