The Guidance Chip is "the finest in Irken guidance technology", which resembles an ordinary computer chip on Earth, hinting that while Zim thinks he "improved it" it may actually be an outdated version, as it was probably inside GIR's head at the time he was made by the Tallest.
Whatever the case, it did give GIR "superior geographic guidance abilities" as he was able to correctly tell Zim where the Skool, planet Blorch, and their home world Irk were in relation to their location. From GIR's point of view when the guidance chip was activated, he could see everything transparent to make any search easier.
During "Walk of Doom", Zim wanted to try out the guidance chip to ensure that it worked by doing a "field test" and getting lost in the city, despite the fact that GIR showed that he could correctly pinpoint certain locations.
Nevertheless, they still made their excursion and after getting lost, Zim had enough of the humans for the day and asked GIR to guide them home, only to find out much to his horror that GIR left it back at the base to make room for a cupcake. This resulted in them having to find their way home by other means, from Zim making a compass to getting money to ride the bus.
The guidance chip was never seen or mentioned again for the rest of the series, implying that Zim didn't want to go through the same ordeal again and therefore didn't give it back to GIR.