<< often times these .msi files are hidden, so that may be why you don't see any of them on your drive...My parents have a computer that they bought back in 1995 that still has Win 95 on it. I was upgrading some things on it recently and found that there was a file named "config.msi" on the root level of C: >>
The Windows Installer is relatively new, not having been around long enough to be part of any Windows build except Windows ME, 2000, and XP. The Windows Installer has only recently (within the last 18 months) been made available as an add-in for Win9x and NT. None of the .MSI files I have are hidden or system files. I'm not sure, but you may have confused Windows Installer Package files for Microsoft System Information files.
The Windows Installer Package is a software distribution/install/uninstall/roll-out tool not unlike Wise Installer, Package for the Web Stub, and competing products. Instead of getting the traditional and recognizable setup components found in a Wise Installer or Web Stub setup (setup.exe, setup.ini, setup.lid, _setup.dll, data1.cab, data1.hdr, ISDel.exe, layout.bin, lang.dat, Os.dat, et al), the Windows Installer creates a single file (similar to self-contained setup files like Package for the Web Stub) with the format .MSI, which may or may not be accompanied by one or more .ini or .cab files.
I was hoping this .MSI package was similar to an 'archive' of these setup components or install files, where I could just extract the setup files from this main .MSI file using some utility, but it appears to be a lot more complicated than that.
You are correct that part of the Windows Installer technology is better management and recording of installed applications and their components, and the respective uninstall information, but that information is kept in the registry. The .MSI Installer Package file is typically read-only and not altered by install or removal of any application.