The European Search Technology Centre will have also have offices in Paris and Munich. The tech giant also confirmed it will be increasing the $600bn it spends on research and development in Europe.
Web research firm ComScore revealed that Microsoft has around 2 percent of the European online search market compared to Google's 79 percent.
"We are the challenger, not the leader, in search, but we believe strongly that search is in its infancy and there is so much room for innovation," Microsoft’s Steve Ballmer told Reuters.
It is not known how much Microsoft will be investing in the centres. Ballmer said: "Over the next few years we expect to employ several hundred people, software developers, in these centres in Europe."