"only executables on local file systems are supported"
This usually means that you can't run executables from a different PC over a network, like via NFS, only ones that reside on your local filesystem. It does not mean that the executables need to be in your home directory. You will not need to install in your home dir.
I'll need a little more info to get to the bottom of this, please answer the following:
What disto are you using?
What window manager are you running?
Are you trying to create this desktop icon while logged in as your root user or a normal user?
What happens when you type the command to start Netscape from a terminal?
Are you using the full path to the executable? (i.e. - /usr/bin/netscape)
Try creating a launcher for your panel & see if you get the same problem.