The engine path is used to check what the best available DMX type is for the target game engine. Only the "bin" folder of a game is necessary (the one with studiomdl.exe, just as the tool-tip says in Blender Source Tools, I think).

But without setting an engine path, you can still export DMXes, and as long as the target game engine supports the DMX type you manually choose to export with, you can still compile the model. Usually games support DMX types made for the game in question and DMX types made before the game was made.

The engine path does not matter at all for SMDs, by the way. (At least I don't think it does.)

It's also used to locate studiomdl when compiling QCs.

But what if you wanted to make a model for a goldsource game (e.g. the first Half-life game) would you set it to its valve file or what? And also, where would I find this "tool-tip" you speak of in Blender?