SQLyog uses MySQL's standard BACKUP TABLE… option to take backups. This option does not work if SQLyog and the MySQL server are running on different machines.
If you want to take backup of a remote database, you have to use DB -> Export Database As Batch Script. SQLyog comes with context sensitive help for all its dialogs. Just press F1 and you will be shown help for the dialog i.e. Export Database As Batch Script.
HTH