The new company will produce convertibles and coupes in Uddevalla, Sweden, with design work being done at TWR factories at Chipping Norton and Kidlington in Oxfordshire.
The initial engineering contract is expected to be worth £150m to TWR, a private company formed in 1976 that now employs 600 at five sites. A spokesman said last night: "It is one of the biggest contracts we have had and is a long-term commitment from Volvo. It will run into the next century and certainly safeguard jobs."
TWR will have a 51 per cent stake and the Swedes 49 per cent. Its share capital will be £8m. Volvo said its investment in the new company's car production would be Skr1.5bn (£129.3m). Talks had been going on between the parties about the project for mostof 1994.
The TWR spokesman added: "When the planned merger of Renault and Volvo broke down in 1993 I think Volvo sat down and thought how best to survive and expand. I think they concluded one way forward was to introduce motor sport and niche markets to introduce new brand values into their name."
The upshot was that the Swedish group re-entered the motor racing world last year when TWR designed and built the mechanics of the Volvo 850 estate, which entered the British Touring Car Championship.
Volvo also announced other investment initiatives yesterday. These include a Skr1.7bn investment by its trucks division in its Swedish and other European plants. Volvo Car Corp is also investing Skr1.7bn in the paint shop of its passenger car plant in Ghent, Belgium.