Samsung, the world's biggest memory chip maker, said the new plant will help boost its competitiveness in the semiconductor industry, which it is showing steady growth due to increased demand from mobile devices.
The plant will make either logic or memory chips, Samsung said, adding that a final decision on products had not been made yet. The firm said its chip production capacity was expected to increase by a "low double digit percentage".
The plant will be located in Pyeongtaek, a city roughly 75 kilometres south of Seoul and construction is scheduled to be completed by the second half of 2017.
The chip business is likely to be a lone bright spot in what's otherwise expected to be a poor third quarter for the South Korean giant.
Profits for company's key smartphone business are slipping rapidly as Apple Inc grabs the lion's share of profits at the high end of the market and Chinese makers of cheap and feature-rich smartphones, like Lenovo Group Ltd and Xiaomi Inc, erode margins at the low end.
The mean forecast from a Thomson Reuters I/B/E/S survey of 42 analysts calls for the firm's July-September operating profit to come in at 5.6 trillion won, its weakest performance since the fourth quarter of 2011.
Some analysts forecast that the chip division could deliver stronger operating profit than the handsets division in the third quarter for the first time in more than three years,
Market conditions for the memory market have remained favourable amid stronger-than-anticipated demand from personal computer and servers. Industry players like Samsung have also be managed their capacity expansion carefully, keeping supply tight.