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It should have a default to the correct folder. If you have XP it should go to Program Files/Ubisoft/Silent Hunter III. If you have Vista or 7 your SH3 folder may be directly in the C: or D: drive. In either case it goes directly into the Silent Hunter III main folder where it modifies the SH3 file.
Before you do anything, though, how new is your version of the game and in what format (i.e. disc or download)? If it's from 2008 or newer it is probably already at 1.4 and doesn't need patching.