The php code will attempt to create the folder if it does not exist... but if there aren't adequate permissions on the parent folder it won't be able to create it. If the proper permissions are on the parent folder, then it will create the upload folder with the same permissions. Either way you need to be able to set the permissions on a folder on your server if they aren't correct and DFP will not help you with that.
You can place the folder wherever you want. Depending on how you are using it it may be inside or even out of your site root.