The <ExternalApplicationOverrides> element is a way of externally defining the content of one or more <ApplicationOverride> elements in file(s) separate from the main configuration. The SP will locate these files at runtime and then load them into the configuration until the main configuration itself is reloaded. It adds a limited degree of file inclusion to the XML configuration.
Multiple elements can be used to designate multiple search locations to examine in sequence, one element per location.
A relative or absolute path to a filesystem location (directory / folder) for override fragments
This isn’t an example of the element itself, but of a snippet of XML that would be placed in the external file. Note the XML namespace; that’s still required, this is XML and the namespace is required as it is for any use of XML.