It is a compatibility setting, intended for legacy code that was written for old versions of Windows that were not Unicode enabled. Versions in the Windows 9x family, Windows ME was the last and widely ignored one. With “Not Set” or “Use Multi-Byte Character Set” selected, all Windows API functions that take a string as an argument are redefined to a little compatibility helper function that translates char* strings to wchar_t* strings, the API’s native string type.
Such code critically depends on the default system code page setting. The code page maps 8-bit characters to Unicode which selects the font glyph. Your program will only produce correct text when the machine that runs your code has the correct code page. Characters whose value >= 128 will get rendered wrong if the code page doesn’t match.
Always select “Use Unicode Character Set” for modern code. Especially when you want to support languages with a right-to-left layout and you don’t have an Arabic or Hebrew code page selected on your dev machine. Use std::wstring or wchar_t[] in your code. Getting actual RTL layout requires turning on the WS_EX_RTLREADING style flag in the CreateWindowEx() call.