The decision, which came as Ford announced a 71 per cent rise in first- quarter profits for its worldwide operations, means Dagenham will provide diesels for the next generation of cars and light vehicles.
Ford said no new jobs would be created as the investment would soak up existing capacity at Dagenham, a plant that was once the by-word for poor industrial relations in Britain.
Ian McAllister, Ford of Britain chairman, said the decision was "excellent news for Dagenham and the British motor industry". Last month Ford chose Dagenham to begin production of cars for its Japanese partner, Mazda.
The decision to invest in Dagenham, which won out against a proposal to build a factory in Hungary, was largely due to the turnaround in efficiency at the plant.
Productivity at Dagenham has been steadily increasing and it is helped by the fact that British wages are some 55 to 60 per cent lower than at Ford's German plant in Cologne.
The use of Japanese lean production techniques and team working have also helped. Current engine output at the plant, running at 3,000 units a day, includes turbocharged 1.8-litre diesel engines for the Mondeo and Escort and naturally aspirated 1.8-litre diesel engines in the Fiesta, Fiesta van, Courier and Escort van. Dagenham also makes about 200,000 Fiesta cars a year.
Meanwhile, Ford yesterday reported a 71 per cent climb in first-quarter profits compared with the same period last year. It was the ninth consecutive quarter that the car manufacturer has reported an earnings improvement.
The company, the number two car maker in the US after General Motors, said earnings reached $1.55bn (£96m) in the period, representing $1.55 a share, compared with $904m in the first quarter of 1994 or 83 cents a share. "This was another strong quarter at Ford," Ford chairman Alex Trotman, said.
Analysts attributed the improved performance to strong car sales, both in the US, where the company's market share has risen to 26.6 per cent, and in markets abroad. "Ford, I think, is benefiting from the new products they've introduced over the last 12 months," David Healy, a leading car industry analyst, said.
Among the new models in the US there are the American versions of the Mondeo, known here as the Ford Contour, and Mercury Mystique, as well as a new mini-van, the Windstar, and restyled utility vehicle, the Ford Explorer. Ford's 1994 profits were a record $5.3bn.
Ford is alone among the big three in Detroit to be able to report an increase in US sales in the first quarter. Chrysler last week reported a 37 per cent drop in first-quarter earnings. GM, which has seen sales drop 8.2 per cent in the first quarter, is due to issue its car division's results today.
The greatest contribution to Ford's higher earnings came from its foreign operations, including in Europe, where car operations generated $316m, a marked increase over $159m a year ago. There was also a strong pick- up in earnings from Ford's financial division, which turned in $409m compared with $69m in 1994's first quarter.
Harmony at Ford, page 15