Hi Bill,
If you don't want the data to be copied to the ArcGIS Server machine, then Yes, a local arcgis server account must also exist on your machine. You can then create a data store from this directory. The arcgis server account will need to have read privileges to any directory you wish to create a data store from.
If you have SDE connections, the path you mentioned stores the connection files there when you create an SDE connection under Database Connections. So, if you wish to create a data store from an SDE geodatabase, the arcgis server account should have read privileges to this directory.