I am adding this reply here for anyone who encounters the above problem.
I have now had this happen twice, when I installed hikashop in a subdomain.
The first time, I just gave up, and went ahead with the site in its main directory.
This time I wanted to create a sister site but with different products, so I had to install it in a subdomain. Again, I got the message as above.
I got the following adice, which finaly fixed it.
Via ftp connect to the remote server
Navigate to where your Joomla root folder
see folder 'tmp' and double click to enter that folder
Right click anywhere in that folder and select to create a folder.
Give the new folder a name and navigate to it
Now on the left hand side navigate to the extension zip
Right click it and select upload.
Then in Joomla >> Extension management install ... install from directory
append the name of the new folder
so
path/tmp
becomes
path/tmp/newfoldername
Click install
If that does not work then unzip the extension zip locally
With Filezilla navigate to the root of the unzipped files
Select all the folders/files in there and right click then select upload
Try the install from directory again