Where does Xcode install if macOS is installed on an external drive?

I foolishly bought a Mac Mini with 128gb internal SSD for compiling Unity games for iOS, thinking "all I need to install is Xcode and Unity, and I can put documents on an external drive". However, macOS eats up about 45GB, Xcode will quickly eat up another 40GB and continue to grow without end, and Unity uses up a few more GB. You need about 40GB of free space to upgrade macOS and about 25GB of free space to upgrade Xcode, meaning that you quickly end up in a situation where there isn't enough free space on the Mac to upgrade anything. One time I cleared up exactly enough free space to upgrade macOS with nothing to spare, then the upgrade ran out of space and failed mid-upgrade (apparently the "required free space" is not accurate). This completely broke the OS and I had to erase everything and reinstall from scratch.

Having run into the "not enough space to upgrade" issue yet again, I'm ready to give up and try something different. Since macOS can be installed on an external drive, I'm thinking I'll reverse the usual strategy - I'll install the OS and applications on the external drive and save documents on the internal drive.

Normally Xcode can only be installed on the internal drive. If macOS is installed on an external drive, will xCode still be installed on the internal drive, or does it install to the same drive as macOS?

Apps from the Mac App Store like Xcode install to /Applications which maps to the Applications folder on the data volume in the same container as the macOS installation. This can be moved wherever you desire after installation, but it sounds like this is the location you want anyway.

Xcode from developer.apple.com is the .app bundle inside a compressed archive. You can download, extract and move the app wherever you desire.