Daffodil looks on the classpath, or using an XML Catalog to find other schema files being included/imported.

When a schemaLocation is provided, it should also look in the same directory along side the file doing the include/import.

This should work recursively, i.e., if you import a namespace, and that file is found by way of the XML Catalog, then files it includes/imports can be found adjacent to where the file was found.