Question

Does it mean search the previous folder for somefile.h or the project folder for somefile.h?

Answer 1

It means that look for somefile.h in the parent folder with respect to the source file where the include directive is found.

In *nix systems(thats where this convention came from AFAIK):

.        manse the current directory.
..       means one level up from the current directory.

For example, if you have the following directories structure:

home
   |
   code
      | src
      | someOtherDirectory

Your source file could be in home/code/src and you have:

#include "../somefile.h"

in your source code, then the compiler is going to look for somefile.h in home/code/