diff --git a/e2e/next/src/next.test.ts b/e2e/next/src/next.test.ts
index c260e4624f6f0..3eb3ed59858dc 100644
--- a/e2e/next/src/next.test.ts
+++ b/e2e/next/src/next.test.ts
@@ -21,6 +21,7 @@ import {
 } from '@nx/e2e/utils';
 import * as http from 'http';
 import { checkApp } from './utils';
+import { removeSync, mkdirSync } from 'fs-extra';
 
 describe('Next.js Applications', () => {
   let proj: string;
@@ -39,6 +40,13 @@ describe('Next.js Applications', () => {
   });
 
   it('should generate app + libs', async () => {
+    // Remove apps/libs folder and use packages.
+    // Allows us to test other integrated monorepo setup that had a regression.
+    // See: https://github.com/nrwl/nx/issues/16658
+    removeSync(`${tmpProjPath()}/libs`);
+    removeSync(`${tmpProjPath()}/apps`);
+    mkdirSync(`${tmpProjPath()}/packages`);
+
     const appName = uniq('app');
     const nextLib = uniq('nextlib');
     const jsLib = uniq('tslib');
@@ -52,7 +60,7 @@ describe('Next.js Applications', () => {
     );
 
     // Create file in public that should be copied to dist
-    updateFile(`apps/${appName}/public/a/b.txt`, `Hello World!`);
+    updateFile(`packages/${appName}/public/a/b.txt`, `Hello World!`);
 
     // Additional assets that should be copied to dist
     const sharedLib = uniq('sharedLib');
@@ -60,13 +68,13 @@ describe('Next.js Applications', () => {
       json.targets.build.options.assets = [
         {
           glob: '**/*',
-          input: `libs/${sharedLib}/src/assets`,
+          input: `packages/${sharedLib}/src/assets`,
           output: 'shared/ui',
         },
       ];
       return json;
     });
-    updateFile(`libs/${sharedLib}/src/assets/hello.txt`, 'Hello World!');
+    updateFile(`packages/${sharedLib}/src/assets/hello.txt`, 'Hello World!');
 
     // create a css file in node_modules so that it can be imported in a lib
     // to test that it works as expected
@@ -76,7 +84,7 @@ describe('Next.js Applications', () => {
     );
 
     updateFile(
-      `libs/${jsLib}/src/lib/${jsLib}.ts`,
+      `packages/${jsLib}/src/lib/${jsLib}.ts`,
       `
           export function jsLib(): string {
             return 'Hello Nx';
@@ -90,7 +98,7 @@ describe('Next.js Applications', () => {
     );
 
     updateFile(
-      `libs/${buildableLib}/src/lib/${buildableLib}.ts`,
+      `packages/${buildableLib}/src/lib/${buildableLib}.ts`,
       `
           export function buildableLib(): string {
             return 'Hello Buildable';
@@ -98,11 +106,11 @@ describe('Next.js Applications', () => {
           `
     );
 
-    const mainPath = `apps/${appName}/pages/index.tsx`;
+    const mainPath = `packages/${appName}/pages/index.tsx`;
     const content = readFile(mainPath);
 
     updateFile(
-      `apps/${appName}/pages/api/hello.ts`,
+      `packages/${appName}/pages/api/hello.ts`,
       `
           import { jsLibAsync } from '@${proj}/${jsLib}';
 
@@ -139,7 +147,7 @@ describe('Next.js Applications', () => {
           )}`
     );
 
-    const e2eTestPath = `apps/${appName}-e2e/src/e2e/app.cy.ts`;
+    const e2eTestPath = `packages/${appName}-e2e/src/e2e/app.cy.ts`;
     const e2eContent = readFile(e2eTestPath);
     updateFile(
       e2eTestPath,
@@ -160,12 +168,13 @@ describe('Next.js Applications', () => {
       checkLint: true,
       checkE2E: isNotWindows(),
       checkExport: false,
+      appsDir: 'packages',
     });
 
     // public and shared assets should both be copied to dist
     checkFilesExist(
-      `dist/apps/${appName}/public/a/b.txt`,
-      `dist/apps/${appName}/public/shared/ui/hello.txt`
+      `dist/packages/${appName}/public/a/b.txt`,
+      `dist/packages/${appName}/public/shared/ui/hello.txt`
     );
 
     // Check that `nx serve <app> --prod` works with previous production build (e.g. `nx build <app>`).
@@ -178,14 +187,9 @@ describe('Next.js Applications', () => {
     );
 
     // Check that the output is self-contained (i.e. can run with its own package.json + node_modules)
-    const distPath = joinPathFragments(tmpProjPath(), 'dist/apps', appName);
     const selfContainedPort = 3000;
-    const pmc = getPackageManagerCommand();
-    runCommand(`${pmc.install}`, {
-      cwd: distPath,
-    });
     runCLI(
-      `generate @nx/workspace:run-commands serve-prod --project ${appName} --cwd=dist/apps/${appName} --command="npx next start --port=${selfContainedPort}"`
+      `generate @nx/workspace:run-commands serve-prod --project ${appName} --cwd=dist/packages/${appName} --command="npx next start --port=${selfContainedPort}"`
     );
     const selfContainedProcess = await runCommandUntil(
       `run ${appName}:serve-prod`,
diff --git a/e2e/next/src/utils.ts b/e2e/next/src/utils.ts
index 2a419b95de815..dc4ef27ebf7f3 100644
--- a/e2e/next/src/utils.ts
+++ b/e2e/next/src/utils.ts
@@ -14,13 +14,15 @@ export async function checkApp(
     checkLint: boolean;
     checkE2E: boolean;
     checkExport: boolean;
+    appsDir?: string;
   }
 ) {
+  const appsDir = opts.appsDir ?? 'apps';
   const buildResult = runCLI(`build ${appName}`);
   expect(buildResult).toContain(`Compiled successfully`);
-  checkFilesExist(`dist/apps/${appName}/.next/build-manifest.json`);
+  checkFilesExist(`dist/${appsDir}/${appName}/.next/build-manifest.json`);
 
-  const packageJson = readJson(`dist/apps/${appName}/package.json`);
+  const packageJson = readJson(`dist/${appsDir}/${appName}/package.json`);
   expect(packageJson.dependencies.react).toBeDefined();
   expect(packageJson.dependencies['react-dom']).toBeDefined();
   expect(packageJson.dependencies.next).toBeDefined();
@@ -45,6 +47,6 @@ export async function checkApp(
 
   if (opts.checkExport) {
     runCLI(`export ${appName}`);
-    checkFilesExist(`dist/apps/${appName}/exported/index.html`);
+    checkFilesExist(`dist/${appsDir}/${appName}/exported/index.html`);
   }
 }
diff --git a/packages/js/src/utils/buildable-libs-utils.ts b/packages/js/src/utils/buildable-libs-utils.ts
index 86a0e62190103..0801a959fd2fb 100644
--- a/packages/js/src/utils/buildable-libs-utils.ts
+++ b/packages/js/src/utils/buildable-libs-utils.ts
@@ -13,6 +13,7 @@ import { unlinkSync } from 'fs';
 import { output } from 'nx/src/utils/output';
 import { isNpmProject } from 'nx/src/project-graph/operators';
 import { ensureTypescript } from './typescript/ensure-typescript';
+import { readTsConfigPaths } from './typescript/ts-config';
 
 let tsModule: typeof import('typescript');
 
@@ -190,40 +191,11 @@ export function computeCompilerOptionsPaths(
   tsConfig: string | ts.ParsedCommandLine,
   dependencies: DependentBuildableProjectNode[]
 ) {
-  const paths = readPaths(tsConfig) || {};
+  const paths = readTsConfigPaths(tsConfig) || {};
   updatePaths(dependencies, paths);
   return paths;
 }
 
-function readPaths(tsConfig: string | ts.ParsedCommandLine) {
-  if (!tsModule) {
-    tsModule = ensureTypescript();
-  }
-  try {
-    let config: ts.ParsedCommandLine;
-    if (typeof tsConfig === 'string') {
-      const configFile = tsModule.readConfigFile(
-        tsConfig,
-        tsModule.sys.readFile
-      );
-      config = tsModule.parseJsonConfigFileContent(
-        configFile.config,
-        tsModule.sys,
-        dirname(tsConfig)
-      );
-    } else {
-      config = tsConfig;
-    }
-    if (config.options?.paths) {
-      return config.options.paths;
-    } else {
-      return null;
-    }
-  } catch (e) {
-    return null;
-  }
-}
-
 export function createTmpTsConfig(
   tsconfigPath: string,
   workspaceRoot: string,
diff --git a/packages/js/src/utils/typescript/ts-config.ts b/packages/js/src/utils/typescript/ts-config.ts
index 64c806d99f707..25f2d5869e4e2 100644
--- a/packages/js/src/utils/typescript/ts-config.ts
+++ b/packages/js/src/utils/typescript/ts-config.ts
@@ -1,6 +1,8 @@
 import { offsetFromRoot, Tree, updateJson, workspaceRoot } from '@nx/devkit';
 import { existsSync } from 'fs';
 import { dirname, join } from 'path';
+import * as ts from 'typescript';
+import { ensureTypescript } from './ensure-typescript';
 
 let tsModule: typeof import('typescript');
 
@@ -76,3 +78,35 @@ export function addTsConfigPath(
     return json;
   });
 }
+
+export function readTsConfigPaths(tsConfig?: string | ts.ParsedCommandLine) {
+  tsConfig ??= getRootTsConfigPath();
+  try {
+    if (!tsModule) {
+      tsModule = ensureTypescript();
+    }
+
+    let config: ts.ParsedCommandLine;
+
+    if (typeof tsConfig === 'string') {
+      const configFile = tsModule.readConfigFile(
+        tsConfig,
+        tsModule.sys.readFile
+      );
+      config = tsModule.parseJsonConfigFileContent(
+        configFile.config,
+        tsModule.sys,
+        dirname(tsConfig)
+      );
+    } else {
+      config = tsConfig;
+    }
+    if (config.options?.paths) {
+      return config.options.paths;
+    } else {
+      return null;
+    }
+  } catch (e) {
+    return null;
+  }
+}
diff --git a/packages/next/plugins/with-nx.spec.ts b/packages/next/plugins/with-nx.spec.ts
index f0dfcf7c17e5b..d4da25951b7eb 100644
--- a/packages/next/plugins/with-nx.spec.ts
+++ b/packages/next/plugins/with-nx.spec.ts
@@ -1,7 +1,7 @@
 import { NextConfigComplete } from 'next/dist/server/config-shared';
-import { getNextConfig } from './with-nx';
+import { getAliasForProject, getNextConfig } from './with-nx';
 
-describe('withNx', () => {
+describe('getNextConfig', () => {
   describe('svgr', () => {
     it('should be used by default', () => {
       const config = getNextConfig();
@@ -64,3 +64,55 @@ describe('withNx', () => {
     });
   });
 });
+
+describe('getAliasForProject', () => {
+  it('should return the matching alias for a project', () => {
+    const paths = {
+      '@x/proj1': ['packages/proj1'],
+      // customized lookup paths with relative path syntax
+      '@x/proj2': ['./something-else', './packages/proj2'],
+    };
+
+    expect(
+      getAliasForProject(
+        {
+          name: 'proj1',
+          type: 'lib',
+          data: {
+            root: 'packages/proj1',
+            files: [],
+          },
+        },
+        paths
+      )
+    ).toEqual('@x/proj1');
+
+    expect(
+      getAliasForProject(
+        {
+          name: 'proj2',
+          type: 'lib',
+          data: {
+            root: 'packages/proj2', // relative path
+            files: [],
+          },
+        },
+        paths
+      )
+    ).toEqual('@x/proj2');
+
+    expect(
+      getAliasForProject(
+        {
+          name: 'no-alias',
+          type: 'lib',
+          data: {
+            root: 'packages/no-alias',
+            files: [],
+          },
+        },
+        paths
+      )
+    ).toEqual(null);
+  });
+});
diff --git a/packages/next/plugins/with-nx.ts b/packages/next/plugins/with-nx.ts
index 8ce9d5e4d9a96..2d991e049a385 100644
--- a/packages/next/plugins/with-nx.ts
+++ b/packages/next/plugins/with-nx.ts
@@ -5,9 +5,12 @@
 import * as path from 'path';
 import type { NextConfig } from 'next';
 import type { NextConfigFn } from '../src/utils/config';
+import { forNextVersion } from '../src/utils/config';
 import type { NextBuildBuilderOptions } from '../src/utils/types';
 import type { DependentBuildableProjectNode } from '@nx/js/src/utils/buildable-libs-utils';
 import type { ProjectGraph, ProjectGraphProjectNode, Target } from '@nx/devkit';
+import { readTsConfigPaths } from '@nx/js';
+import { findAllProjectNodeDependencies } from 'nx/src/utils/project-graph-utils';
 
 export interface WithNxOptions extends NextConfig {
   nx?: {
@@ -207,6 +210,22 @@ function withNx(
       // Get next config
       const nextConfig = getNextConfig(_nextConfig, context);
 
+      // For Next.js 13.1 and greater, make sure workspace libs are transpiled.
+      forNextVersion('>=13.1.0', () => {
+        if (!graph.dependencies[project]) return;
+
+        const paths = readTsConfigPaths();
+        const deps = findAllProjectNodeDependencies(project);
+        nextConfig.transpilePackages ??= [];
+
+        for (const dep of deps) {
+          const alias = getAliasForProject(graph.nodes[dep], paths);
+          if (alias) {
+            nextConfig.transpilePackages.push(alias);
+          }
+        }
+      });
+
       const outputDir = `${offsetFromRoot(projectDirectory)}${
         options.outputPath
       }`;
@@ -418,10 +437,30 @@ function addNxEnvVariables(config: any) {
   }
 }
 
+export function getAliasForProject(
+  node: ProjectGraphProjectNode,
+  paths: Record<string, string[]>
+): null | string {
+  // Match workspace libs to their alias in tsconfig paths.
+  for (const [alias, lookup] of Object.entries(paths)) {
+    const lookupContainsDepNode = lookup.some(
+      (lookupPath) =>
+        lookupPath.startsWith(node?.data?.root) ||
+        lookupPath.startsWith('./' + node?.data?.root)
+    );
+    if (lookupContainsDepNode) {
+      return alias;
+    }
+  }
+
+  return null;
+}
+
 // Support for older generated code: `const withNx = require('@nx/next/plugins/with-nx');`
 module.exports = withNx;
 // Support for newer generated code: `const { withNx } = require(...);`
 module.exports.withNx = withNx;
 module.exports.getNextConfig = getNextConfig;
+module.exports.getAliasForProject = getAliasForProject;
 
 export { withNx };
diff --git a/packages/next/src/utils/config.ts b/packages/next/src/utils/config.ts
index b1be952f4d079..2586b7d3f0295 100644
--- a/packages/next/src/utils/config.ts
+++ b/packages/next/src/utils/config.ts
@@ -107,3 +107,12 @@ function isTsRule(r: RuleSetRule): boolean {
 
   return r.test.test('a.ts');
 }
+
+// Runs a function if the Next.js version satisfies the range.
+export function forNextVersion(range: string, fn: () => void) {
+  const semver = require('semver');
+  const nextJsVersion = require('next/package.json').version;
+  if (semver.satisfies(nextJsVersion, range)) {
+    fn();
+  }
+}