The project will connect the town with the national rail network for the first time in more than five decades.
The new innovation centre will be built at the site of the old Dudley Train Station in Castlehill.
Its main objective is to reduce the weight and cost of a railcar by half in order to facilitate low cost connectivity of suburban and rural areas.
Very Light Rail could put the old rail routes in towns and cities back into service at a fraction of the cost of heavier rail alternatives.
Facilities will include a triple-height engineering hall, research laboratories, conference and seminar rooms, and offices for 45 people, alongside more public areas, including exhibition spaces, a café and an auditorium.
The project is being overseen by the Dudley Metropolitan Borough Council and Warwick Manufacturing Group of the University of Warwick.
The new line will comprise two tracks, one for pilot testing of VLR vehicles manufactured at the centre, and the other for passenger services to the Dudley Port station, providing connections to major public areas, including the Birmingham City Centre, Dudley town centre, Dudley Zoo and Black County museums.