When you create a top-level folder, it resides on the public folder server where you created it (for example, your hierarchy server).
When you create a subfolder, it inherits the replication configuration and replica list of its parent folder. This can later be changed by an administrator so that the parent folder and its subfolders are replicated to different servers.
The advantage of inheriting replication information is that the contents of the subfolders are available in the same locations with the same permissions as their parent folders.
If the top-level folder is not replicated, then all its subfolders are stored on the same public folder as the top-level folder. If the top-level folder is replicated, its subfolders are stored on every public folder server that contains a replica.