The investment was announced at the presidential compound in Mexico City
US giant Ford is to invest $3bn (£1.5bn) in a new car plant in Mexico, the biggest investment in the country's manufacturing sector.
The move is a blow to American car workers who had hoped the factory would be built in the United States.
Ford has lost more than $15bn (£7.5bn) over the past two years and says the new facility is crucial to its future.
Mexican President Felipe Calderon hailed the announcement as a "turning point" for his country.
The new factory, and other changes to Ford's Mexican operations, are likely to create an estimated 4,500 jobs in Mexico, where car workers earn substantially less than their American counterparts.
Mr Calderon made the announcement with Ford president Alan Mullaly at the presidential compound in Mexico City on Friday.
"We want Mexico to be an automotive country, one that is competitive and with the most advantages so that the worldwide automotive industry will establish itself here," Mr Calderon said.
Mr Mullaly said: "We are convinced the geographic location as well as Mexico's highly qualified labour force and economic stability make this decision the right one for our business."
The factory will build Ford's new Fiesta sub-compact car, which is the company's attempt to shift towards the fast-growing market for smaller, more fuel-efficient cars.
It will be located near Mexico City and the plant is expected to start delivering the Fiesta to the US market in 2010.
The BBC's Duncan Kennedy in Mexico City says Ford, the second largest car manufacturer in the US, is being hit by the slowdown in consumer spending and soaring oil prices.
Drivers are moving away from Ford's traditional stable of bigger trucks and Sports Utility Vehicles because of rising fuel prices, plummeting house prices and concerns about the environment, he says.
The decision to invest in Mexico will be a blow to the United Auto Workers union, which reached a cost-cutting agreement with Ford in a bid to make US plants more competitive.
The company had also hoped its programme of slashing cut-price vehicles to car hire companies would help ease its financial woes.
But earlier this month, Ford announced it was abandoning its goal of making its loss-making North American business profitable next year.
Ford's plans in Mexico also include moving one of its factories from large truck to small car production, and opening a new diesel engine line at another plant.