By Allison Martell

OSHAWA, Ontario (Reuters) - General Motors Co <GM.N> said on Friday it will expand its Canadian engineering base to reach a total of about 1,000 jobs in Canada's auto-making province of Ontario as it boosts research spending on connected and driverless cars.

The company will also invest $10 million in its Kapuskasing, Ontario cold-weather facility, where it will conduct testing for new GM products, GM announced at its engineering center in Oshawa.

The gain of some 700 jobs was hailed as a big win for Canada's manufacturing heartland by Prime Minister Justin Trudeau, who arrived at the center with the head of GM Canada in a Chevy Bolt, the automaker's signature electric car.

"It's a perfect fit in so many ways, and I'm really glad that GM saw it that way too," Trudeau said.

Canadian automaking has been losing ground in recent years to Mexico, where costs are lower, and the country is struggling to fire up innovation and investment in its factory sector to offset the slump in its once-dominant energy sector.

The union representing the auto workers said the investment is good for the future of the sector in Canada.

"I'm incredibly optimistic, I mean this is a great news story for Canada. To me this shows General Motors' long term commitment to Canada," said Unifor National President Jerry Dias.

Ontario assembly plants produced nearly 15 percent of North American vehicles over the last five years and the auto industry contributes around $16 billion annually to the province’s GDP.

But growth in auto production in Mexico and the United States has outpaced that of Canada.

Mexico's auto production rose 5.6 percent while exports climbed 4.4 percent in 2015 over the prior year, the Mexican Auto Industry Association (AMIA) said in January. The auto sector makes up about 30 percent of Mexico's exports.

Ontario's provincial Liberal government and GM's Canadian president, Stephen Carlisle, have been promoting the province as a high-tech hub for connected-car development. Ontario is the first Canadian province to allow on-road testing of autonomous vehicles.

Still, Unifor's Dias said the driverless-car industry is still marginal, and will not replace manufacturing jobs in Ontario's existing plants.

Unifor's current contract with the Big Three automakers expires in the autumn, and the union fears GM's Oshawa plant risks being closed because it has not been promised new products. Dias warned this week "there will be a strike in 2016" if there is no new product in Oshawa.

(Additional reporting by Allison Lampert in Montreal, Writing by Andrea Hopkins, Editing by Chizu Nomiyama and Phil Berlowitz)