diff --git a/e2e/node/src/node-server.test.ts b/e2e/node/src/node-server.test.ts
index 94e02db3da0cc..25c18b45bc91e 100644
--- a/e2e/node/src/node-server.test.ts
+++ b/e2e/node/src/node-server.test.ts
@@ -64,7 +64,7 @@ describe('Node Applications + webpack', () => {
     const expressApp = uniq('expressapp');
     const fastifyApp = uniq('fastifyapp');
     const koaApp = uniq('koaapp');
-    const nestApp = uniq('koaapp');
+    const nestApp = uniq('nest');
 
     runCLI(`generate @nx/node:lib ${testLib1}`);
     runCLI(`generate @nx/node:lib ${testLib2} --importPath=@acme/test2`);
@@ -98,7 +98,22 @@ describe('Node Applications + webpack', () => {
     expect(() => runCLI(`lint ${nestApp}-e2e`)).not.toThrow();
 
     // Only Fastify generates with unit tests since it supports them without additional libraries.
-    expect(() => runCLI(`lint ${fastifyApp}`)).not.toThrow();
+    expect(() => runCLI(`test ${fastifyApp}`)).not.toThrow();
+
+    // https://github.com/nrwl/nx/issues/16601
+    const nestMainContent = readFile(`apps/${nestApp}/src/main.ts`);
+    updateFile(
+      `apps/${nestApp}/src/main.ts`,
+      `
+      ${nestMainContent}
+      // Make sure this is not replaced during build time
+      console.log('env: ' + process.env['NODE_ENV']);
+      `
+    );
+    runCLI(`build ${nestApp}`);
+    expect(readFile(`dist/apps/${nestApp}/main.js`)).toContain(
+      `'env: ' + process.env['NODE_ENV']`
+    );
 
     addLibImport(expressApp, testLib1);
     addLibImport(expressApp, testLib2, '@acme/test2');
diff --git a/packages/webpack/src/utils/with-nx.ts b/packages/webpack/src/utils/with-nx.ts
index b8e0bfb9bfa18..870b6026e0c1b 100644
--- a/packages/webpack/src/utils/with-nx.ts
+++ b/packages/webpack/src/utils/with-nx.ts
@@ -139,16 +139,20 @@ export function withNx(pluginOptions?: WithNxOptions): NxWebpackPlugin {
         : undefined,
       target: options.target,
       node: false as const,
-      // When mode is development or production, webpack will automatically
-      // configure DefinePlugin to replace `process.env.NODE_ENV` with the
-      // build-time value. Thus, we need to make sure it's the same value to
-      // avoid conflicts.
-      //
-      // When the NODE_ENV is something else (e.g. test), then set it to none
-      // to prevent extra behavior from webpack.
       mode:
-        process.env.NODE_ENV === 'development' ||
-        process.env.NODE_ENV === 'production'
+        // When the target is Node avoid any optimizations, such as replacing `process.env.NODE_ENV` with build time value.
+        options.target === ('node' as const)
+          ? 'none'
+          : // Otherwise, make sure it matches `process.env.NODE_ENV`.
+          // When mode is development or production, webpack will automatically
+          // configure DefinePlugin to replace `process.env.NODE_ENV` with the
+          // build-time value. Thus, we need to make sure it's the same value to
+          // avoid conflicts.
+          //
+          // When the NODE_ENV is something else (e.g. test), then set it to none
+          // to prevent extra behavior from webpack.
+          process.env.NODE_ENV === 'development' ||
+            process.env.NODE_ENV === 'production'
           ? (process.env.NODE_ENV as 'development' | 'production')
           : ('none' as const),
       devtool: