Funding of nearly £38m has been announced for a facility to make compound semiconductors - a new technology behind robotics, 5G and driverless cars.
The 10 councils in the Cardiff Capital Region are set to develop the foundry in Newport, which could create about 2,000 high skilled jobs in five years.
The funding follows £12m from the Welsh Government in November 2015.
First Minister Carwyn Jones said it would boost Wales' global reputation.
The factory will be owned by the councils and is projected to create £375m of private sector investment in the next five years.
Compound semiconductors are expected to revolutionise technology and enable a wide range of developments like robotics, 5G, renewable energy and driverless cars.
Making south east Wales a European centre of excellence for the technology behind modern electronics was central to the £1.2bn City Deal agreed between the local authorities and the Welsh and UK governments.
Welsh company IQE, which is based in St Mellons, Cardiff, and exports around the world, has already joined with Cardiff University and the Welsh Government to invest in developing a compound semiconductor cluster in the area.
Already there are a number of companies making and using more traditional semiconductors - made of silicon - across south east Wales.
The aim of the latest investment is to create a network of those companies and help them develop further so that Wales can be a world leader in making them and developing technologies that will use them.
Mr Jones said: "Today's announcement is great news for Wales - and the first of many new exciting projects set to make a real difference to the economy of south east Wales and, ultimately, to people's lives."
Chairman of the City Deal regional cabinet, Rhonda Cynon Taf council leader Andrew Morgan, said the foundry was the "first tangible demonstration" of the partnership in action.
The dream of those behind this project is that compound semiconductors will do for south east Wales what silicon semiconductors did for Palo Alto in California.
The development of silicon semiconductors revolutionised technology and became a lucrative industry. Silicon Valley became known around the world and attracted high levels of investment and became "the place " to set up tech companies.
Compound semiconductors are in effect the next generation. Using them, technologies can develop that can for instance make solar energy more efficient, enable 5G, improve robotics, or driverless cars.
They would also make possible developments often referred to as "The Internet of Things", where our devices can talk to each other. For instance where vehicles or buildings can communicate with each other and exchange data.
The technological opportunities are wide-ranging and the dream is that by being at the forefront of development of compound semiconductors the whole of the Welsh economy would move up a gear. One of the aims of the Cardiff City Deal was to increase productivity in south east Wales and the development of this cluster has been very much a part of that aim.
What also stands out is that the local authorities that made up the Cardiff Capital Region would own the foundry that would make the compound semiconductors and it would be leased to the private sector. The investment is not a grant or a loan but a commercial investment and the business plan is for the original investment plus interest to be returned to the councils over the lifetime of the project.