The Valley of the Dragons is located somewhere in Scotland.
In my copy of Dragon Rider there's a "Meet The Author" section at the end. One of the questions asks about the Valley of the Dragons:
Q: Do You know where the Valley of the Dragons is? Have you ever been to Scotland?
Cornelia Funke: I don't know Scotland well enough to answer that, but I look forward to visiting the Edinburgh literary festival every year.
How do we know the valley is called The Valley of the Dragons? There's a "Who's who in Dragon Rider" section immediately after the "Meet The Author" section that introduces the different creatures from the story.
The last entry is for Slatebeard who we meet in the first few chapters, and stays in the valley along with Firedrake and the other dragons:
Slatebeard - an old, wise dragon, living in the Valley of the Dragons.
Additionally, Cornelia Funke has a quiz on her website that asks this exact question. The options are California, Scotland, Italy, and the Himalayas. Scotland is (spoiler alert) the right answer:
Q: Where is the valley of the dragons from where Firedrake and Sorrel set off to find the Rim of Heaven?
A: In Scotland - Correct. And later, Barnabas Greenbloom reads to Ben and his family the good news that a newspaper in Scotland had reported a swarm of 'giant birds' flying southwards through the moonlight. The dragons were finally on their way to the Rim of Heaven.
The passage where Barnabas reads about the "swarm of 'giant birds'" is as follows:
...And he [Barnabas] read aloud:
"A strange phenomenon was observed two days ago in the night sky over a Scottish valley. A large flock of gigantic birds, or some have described them as creatures resembling giant bats, rose into the sky and flew south in the light of the full moon.."
Dragon Rider - Chapter 57: Good News