As you stated the example, LabVIEW does not have problem to locate the subVI if you change the blah directory.
The path to subVI bar.vi is stored as something equivalent to ..\..\lib\bar.vi in the caller foo.vi. Since the relative path of VIs didn't change, the subVI is located directly without having to rely on Search Paths.
LabVIEW will need the search paths only if your coworker uses a different directory architecture that breaks the relative paths, something like locating the VIs as c:\bleh\app\foo.vi and c:\bleh\mylib\bar.vi. Then c:\bleh\* (or c:\bleh\mylib) has to be in the Search Paths for bar.vi to be searched ans located. However, this search path can't be specified as a relative path in the list. Anyway, a relative search path like \..\* would be relative to what?
