"Daimler and Beijing Automotive Group will significantly deepen their already strong strategic partnership," the German group said in a statement.
Under a binding agreement signed by Daimler chief executive Dieter Zetsche and BAIC chairman Xu Heyi in Stuttgart, "Daimler is going to invest in BAIC Motor, the passenger car unit of BAIC Group," the statement said.
"This important joint strategic move comes ahead of an intention by BAIC Motor to launch an initial public offering (IPO) in the future. Daimler's investment will take place through the issuance of new shares corresponding to a twelve percent stake in BAIC Motor," it said.
The purchase of the stake was subject to the approval by the relevant authorities and a closing of the transaction was expected "by the end of this year or early next year."
As part of the agreement, Daimler would receive two seats on the BAIC Motor's board of directors.
BAIC will increase its stake in the production joint venture Beijing Benz Automotive Company (BBAC) to 51 percent from 50 percent.
At the same time, Daimler would increase its stake in the integrated sales joint venture Beijing Mercedes-Benz Sales Service also to 51 percent from 50 percent.
"Following our technical cooperation with BAIC Motor and the setup of our integrated sales company, we are now taking the next step in deepening our relationship even further," said Zetsche.
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"Our investment is a strong sign of the increased level of trust and cooperation between our two companies and clearly emphasizes the long-term commitment to a joint successful future of our two companies," he said.