This option serves to specify the include path, where the compiler looks for include files. {$INCLUDEPATH XXX} will add XXX to the include path. XXX can contain one or more paths, separated by semi-colons or colons.
For example:
{$INCLUDEPATH ../inc;../i386}
{$I strings.inc}
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will add the directories ../inc and ../i386 to the include path of the compiler. The compiler will look for the file strings.inc in both these directories, and will include the first found file. This directive is equivalent to the -Fi command-line switch.
Caution is in order when using this directive: If you distribute files, the places of the files may not be the same as on your machine; moreover, the directory structure may be different. In general it would be fair to say that you should avoid using absolute paths, instead use relative paths, as in the example above. Only use this directive if you are certain of the places where the files reside. If you are not sure, it is better practice to use makefiles and makefile variables.