The plan, which could be a significant boost to Michigan's lagging economy, was unveiled at a news conference in Lansing, Mich.
"Michigan has been Googled," Granholm said. "These are jobs that will keep our young people in Michigan."
Google's project involves opening an office for its AdWords unit, which handles "pay-per-click" advertising to users of Google's Internet search engine, officials said.
The location made sense for Mountain View, Calif.-based Google because of the talent pool in the area, said David Fischer, director of online sales and operations. He defended the decision to build in the heart of the Rust Belt.
"We don't get caught up in the conventional wisdom and try to look at things with fresh eyes," he said at the news conference.
Job opportunities with Google's Ann Arbor-area facility were expected to open quickly, officials said. They said the project is expected to generate 1,000 direct jobs within five years, as well as 1,200 indirect jobs.
"Google was started by two Stanford graduate students and has expanded by hiring very smart people mostly from universities," CBS News technology analyst Larry Magid said. "It's far more concerned with raw talent than it is in experience so it should have no trouble finding good people in at a university town like Ann Arbor."
The state offered Google $38 million in tax breaks over 20 years, should its employment reach 2,000. The Michigan Economic Growth Authority met Tuesday morning and approved the incentives.
Granholm, a Democrat, is being challenged for re-election by Republican Dick DeVos. She has been criticized for not attracting high-tech jobs to the state.
Michigan's seasonally adjusted unemployment rate was 6.0 percent in May, compared with a national rate of 4.6 percent that month. Economists have said they expect the state jobless rate to climb until 2008.
"I don't expect this Michigan expansion to have any negative effect on jobs in Google's home turf in California," Magid said. "The company is growing in multiple directions and is always launching new projects, so I think they're going to have plenty of demand for engineers and other employees."
Ann Arbor is a city of 113,271 people about 35 miles west of Detroit. It is home of the University of Michigan and of a number of high-tech businesses.
Google co-founder Larry Page is a native of East Lansing and graduated from the University of Michigan. Google already has a small sales office in Southfield.