I found an good overview about this:
http://www.sharepointnutsandbolts.com/2009/12/managed-metadata-in-sharepoint-2010-key.html
Specifying whether ‘Fill-in’ choices are allowed (shown on lower part of above image):
- First thing to note is that ‘fill-in’ choices are only possible when the ‘Submission Policy’ of the linked parent term set is set to ‘Open’. This provides centralized master control to override the local setting on the column.
- When the “Allow ‘Fill-in’ choices” option on the column is set to ‘Yes’, we specify that authors can add terms into the taxonomy as they are tagging items - in taxonomic terms, this model is known as a folksonomy, meaning it is controlled by end users/community rather than centrally defined. Although the setting is quite innocuous, but this is hugely different in Information Architecture terms – typically it is often beneficial when content authors are trusted and capable and there is a desire to grow the taxonomy ‘organically’, perhaps because a mature one doesn’t exist yet.