Comment by inglor_cz

Watermills are pretty limited technology, though. It is advantageous to build them on rivers in hilly terrain, which is usually far from the seaports that are used for trade. Hilly terrain is also often agriculturally subpar, therefore you need to import food for the workers from the lowland, making the operation more expensive.

Finally, medieval watermills cannot produce heat, which is absolutely necessary for production of iron and steel. Which means that you cannot increase production of iron and steel beyond pre-modern levels, a major obstacle in development of technical civilization.