"Factories produce vehicles for your war effort. Vehicles are tougher and more powerful than infantry, but correspondingly more expensive and require greater space in the Unit Transport. Upgrading a Factory unlocks new types of vehicles with new roles."
~In-game description of Factory
Factories produce vehicles that are stored in the Unit Transport, can be used in attacks and can be donated to squad mates. These vehicles are stronger, more expensive and take up more space in the Unit Transport than infantry. By upgrading a factory, new vehicles can be unlocked.