A development agreement between the Mercedes parent and Bosch aims at "production-ready development of a driving system which will allow cars to drive fully autonomously in the city," the firms said in a statement.
"By the beginning of the next decade," the firms hope to produce "level 4" self-driving vehicles - able to take over from the driver only under certain conditions - as well as the more challenging "level 5", or completely automated driving under all circumstances.
Firms like Bosch and Daimler, both dating back to the 19th century, are joining the race launched by Silicon Valley technology firms like Google or Uber to create a vehicle that can drive itself in busy, unpredictable urban environments.
Beyond practical considerations, Daimler and Bosch expect the new technology to change people's relationships to cars, with car-sharing becoming more popular as automated driving spreads.
"Customers will be able to order an automated shared car with their smartphone. The vehicle will then make its way autonomously to the user," the firms suggest.