An official announcement is expected next week, one person close to negotiations said. Two sources said the investment would be above 1 billion euros ($990.60 million).
VW declined to comment.
VW, which makes about 40 percent of sales and half of its profits in China, already carries out research and development for vehicle technology in the country, seen as a more advanced market on digital innovation than Europe or the United States.
VW operates numerous joint ventures in China, holding a 75 percent stake in its venture with, a 50 percent stake with SAIC and 40 percent with FAW.
In Germany, the automaker's software subsidiary Cariad has a partnership with supplier Bosch to develop software for automated driving.
VW is waiting for the results of the elections taking place on Sunday in the German state of Lower Saxony before making an official announcement on the China investment, the sources said.