When you add a directory under the "Directories" section of the compiler, you are setting the compilers "-I" option.
"-I" adds a directory to the compiler search path for include files. When the compiler tries to locate header files, it will search each directory in the search path for the exact filename provided in the #include directive.
For example, if your project contains the following directory structure (at the root of the project):
my_headers my_header.h sub_dir my_sub_header.h
You can add the following to the "Directories" compiler setting
"../my_headers" ('../' is required as projects are built in a subdirectory of the project root)