React Material UI open modal from within autocomplete lose focus

The problem with having the Modal rendered from within the Autocomplete is that events propagate from the Modal to the Autocomplete. In particular, click and mouse-down events are both handled by Autocomplete in a manner that causes problems in your case. This is primarily logic intended to keep focus in the right place as you interact with different parts of the Autocomplete.

Below (from https://github.com/mui-org/material-ui/blob/v4.9.11/packages/material-ui-lab/src/useAutocomplete/useAutocomplete.js#L842) is the portion of the Autocomplete code that is getting in your way:

  // Prevent input blur when interacting with the combobox
  const handleMouseDown = (event) => {
    if (event.target.getAttribute('id') !== id) {
      event.preventDefault();
    }
  };

  // Focus the input when interacting with the combobox
  const handleClick = () => {
    inputRef.current.focus();

    if (
      selectOnFocus &&
      firstFocus.current &&
      inputRef.current.selectionEnd - inputRef.current.selectionStart === 0
    ) {
      inputRef.current.select();
    }

    firstFocus.current = false;
  };

The default browser behavior when a mouse down event occurs on a focusable element is for that element to receive focus, but the mouse-down handler for Autocomplete calls event.preventDefault() which prevents this default behavior and thus prevents a focus change from the mouse-down event (so focus stays on the Modal itself as indicated by its blue focus outline). You can however successfully move focus to the Modal's TextField using the tab key, since nothing is preventing that mechanism of focus change.

The Autocomplete click handler is keeping focus on the input of the Autocomplete even if you click some other part of the Autocomplete. When your Modal is open, the effect of this is that when you click in the Modal, focus is moved briefly to the Autocomplete input element, but the focus is immediately returned to the Modal due to its "enforce focus" functionality. If you add the disableEnforceFocus property to the Modal, you'll see that when you click in the Modal (e.g. on the TextField) the cursor remains in the input of the Autocomplete.

The fix is to make sure that these two events do NOT propagate beyond the Modal. By calling event.stopPropagation() for both the click and mouse-down events on the Modal, it prevents the Autocomplete functionality for these two events from being executed when these events occur within the Modal.

      <Modal
        onClick={event => event.stopPropagation()}
        onMouseDown={event => event.stopPropagation()}
        ...

Related answer: How can I create a clickable first option in Material UI Labs Autocomplete

The problem in your code was that the Modal was rendered from within the tag of the AutoComplete component, which was not ok because of the visibility of the components, the hierarchy of the components was the issue.

The fix is to move the Modal within the FixedTags component and pass the open handler to the ModalBtn in the renderTags prop;

I've updated your sandbox with a working variant HERE

The changes are below

const ModalBtn = ({ handleOpen }) => (
  <button type="button" onClick={handleOpen}>
    Open Modal (not working)
  </button>
);

const FixedTags = function() {
  const classes = useStyles();
  const [modalStyle] = React.useState(getModalStyle);
  const [open, setOpen] = React.useState(false);

  const handleOpen = () => {
    setOpen(true);
  };

  const handleClose = () => {
    setOpen(false);
  };

  return (
    <>
      <Autocomplete
        multiple
        options={autoCompleteItems}
        getOptionLabel={option => option.title}
        defaultValue={[autoCompleteItems[1], autoCompleteItems[2]]}
        renderTags={(value, getTagProps) =>
          value.map((option, index) => <ModalBtn handleOpen={handleOpen} />)
        }
        style={{ width: 500 }}
        renderInput={params => (
          <TextField
            {...params}
            label="Fixed tag"
            variant="outlined"
            placeholder="items..."
          />
        )}
      />
      <Modal open={open} onClose={handleClose}>
        <div style={modalStyle} className={classes.paper}>
          <h2 style={{ color: "red" }}>This one doesn't work</h2>
          <p>Text field is not available</p>
          <TextField label="Filled" variant="filled" /> <br />
          <br />
          <br />
          <FixedTags label="Standard" />
        </div>
      </Modal>
    </>
  );
};