Construction on the project, worth SR75 billion ($20 billion), is scheduled to begin immediately.
The first production units will come on line in the second half of 2015, with all units expected to be up and running in 2016.
The joint venture called "Sadara Chemical Company" will build one of the world's largest chemical facilities, producing more than three million metric tons of chemical products and plastics a year.
Sadara is expected to deliver annual revenues of around $10 billion within a few years of operation and generate thousands of direct and indirect employment opportunities through the complex and related investments in downstream value parks.
The authorization, from the boards of directors of both companies, comes after an extensive project feasibility study and front-end engineering and design effort that began in 2007.
"We are pleased to have Dow as our partner, as they bring a fantastic record of success in the chemicals business and a top-tier brand to the project," said Saudi Aramco President and CEO Khalid Al-Falih.
He said Dow also brings a superior mix of downstream product technologies, and world-class operational and marketing capabilities to the Sadara joint venture.
"These will complement the strengths of Saudi Aramco as the world's largest integrated and most reliable supplier of energy and petroleum-based derivative products," Al-Falih added.
"This enterprise will play a key role in the Kingdom's industrial and economic diversification while contributing to the creation of thousands of high quality jobs," he said.
"It will enable significant development in the country's conversion industry, thereby supporting Saudi Arabia's ambition to be a magnet for downstream manufacturing investments that add significant value to the Kingdom's hydrocarbon resources."
Many of Sadara's products will be produced for the very first time in Saudi Arabia.
Sadara will become an equal joint venture between Saudi Aramco and Dow after an initial public offering.
Export credit agencies and financial institutions will also provide project financing in addition to equity from the partners.
The 26 manufacturing-unit complex will include a world-scale cracker that will be able to process a wide range of feedstock and be supplied by Saudi Aramco's extensive integrated hydrocarbon infrastructure.
The manufacturing units will produce a wide range of performance products such as polyurethanes, propylene oxide, propylene glycol, linear low-density polyethylene, low-density polyethylene, glycol ethers and amines.
Sadara will have responsibility for product marketing within a local zone of eight countries.
Dow will market and sell on behalf of Sadara to all countries outside the Middle East.
Andrew N. Liveris, Dow's chairman and CEO, said Monday's announcement is outstanding proof of Dow's ongoing commitment to "our growth strategy".
He said the premier partnership is the right economic ownership model with the right partner.
He said customers in emerging geographies such as China, the Middle East, Eastern Europe and Africa will benefit from a strong supplier with feedstock integration, in-market commercial and supply capabilities, advanced technologies and resources to grow with their demand. "Taken together, Sadara will deliver significant new equity earnings to Dow," Liveris said.
