Daimler will invest 250 million euros in its Mercedes-Benz plant in Kecskemet, Hungary.
Daimler said the investment will be used to expand facilities to build car bodies for the next generations of its compact lineup and for new technologies that will help improve production.
"Thanks to the investment in new, highly modern technology, the company will increase its production efficiency and flexibility," the automaker said in a statement.
Daimler builds three compact cars at the factory in central Hungary, which opened in 2012 - the Mercedes B class, CLA and CLA Shooting brake, according to Automotive News Europe’s European plant map. The plant produced 150,000 cars in 2014.
Booming sales of its compact car range helped Mercedes to pass Audi last year as the global No. 2 luxury brand behind BMW. Sales of Mercedes's compact cars rose by 26 percent to 582,531, accounting for 31 percent of the brand's total global volume of 1.87 million.
Daimler has said it will also invest in its factory in Rastatt, Germany, which also builds compact cars.
Earlier this month, Polish and German press reports said Daimler is mulling a plant in Poland to build vehicles that could be based on its new real-wheel-drive MRA modular architecture that will eventually underpin the Mercedes brand's upmarket models including the C-class, E-class and S-class sedans, and crossovers such as the GLC.