I completely agree with the study referenced that applying standard accounting rules and ROI calculations may mean the death of innovation. The reason we need innovation is because conventional ideas don't work (or will no longer work), and therefore, using conventional methods to quantify innovation will also not work.

Innovation is generally unplanned, cannot be mandated, and needs the support, inspiration and vision of leaders. To emphasize on this point, I would like to quote the following lines from Darwin's Origin of Species:

Similarly, when preparing a business case, it is essential to be simple - an idea (innovation) is just a seed. Once we get the time & resources, it is up to us to nurture it slowly and steadily into a plant, which will ultimately bear fruits (i.e. ROI)

The fact is that it can be done - RedGate has proved it (SQLSearch), Google has proved it (GMail) and so have others - there is no reason why we can't do it. The most important thing is the part about building the business case, as Steve so rightly mentioned, and having the leadership and vision to instill curiosity amongst all those who get involved.

References:

1. Source: National Public Radio

Program: Talk of the Nation: Science Friday

Date: Oct 25, 2008 (Talk with Judy Estrin, author of Closing the Innovation Gap: Reigniting the Spark of Creativity in a Global Economy)

2. The New York Times – May 24, 2009 – UNBOXED: Who says innovation belongs to the small?

(http://www.nytimes.com/2009/05/24/business/24unboxed.html?th&emc=th)

(For those wondering about how I remembered the exact dates from 2 years ago - I had done a short self-study on the subject of Innovation, and these came right out of that bibliography!)