Microsoft Corp. ( MSFT - Analyst Report ) recently announced the expansion of its data center and the Internet-based version of its Office software suite in China to meet the fast-growing demand for Internet usage and data storage capacity in the country.

In order to sell its services in China, Microsoft has signed a licensing agreement with Beijing-based 21Vianet Group Inc., which will operate the data centers and cloud services in the country.

By using Office 365, customers can gain online access to Microsoft’s word processing, spreadsheet and email programs. Windows Azure will enable users to customize online applications and store data on Microsoft’s remote computers.

A recent survey conducted by a data center dedicated website, datacenterdynamics.com, on 100,000 facilities shows that data center usage is expected to grow around 7% in 2012. Moreover, the website has also increased its investment projection for new data centers from about $30.0 billionin 2010-11 to $35.0 billion in 2011-2012.

In a bid to benefit from the growing Chinese market, Microsoft is increasing its investment in the country, expecting to sell more services to Chinese companies and government agencies.

Recently, Microsoft hired more than 1,000 employees in China across its research and development (R&D) and marketing segments. The company plans to boost its R&D spend by 15% annually. Microsoft is also building a large cloud computing center in Shanghai that will employ around 600 more employees.

Currently, Google’s ( GOOG - Analyst Report ) mobile operating system, Android dominates the Chinese smartphone market, with Apple's ( AAPL - Analyst Report ) iPhone dominating the higher end of the market. Both the technology companies, Apple and Google have already launched new products in the Chinese market, increasing their market share. Microsoft’s position in the mobile segment remains weak, although Windows 8 could improve the situation. In the meantime, Microsoft continues to solidify its position in other segments, such as the cloud, where its offerings make it one of the most reliable suppliers.

We believe that Microsoft’s current investments are supported by its strong balance sheet and expect these to drive the next growth phase, improving prospects of market share gains.

Microsoft Corp. has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).