I’ve consolidated some thoughts on innovation, thus:

Innovation = f(#of brains, quality of brains, self-regard, challenge to these brains, opportunity)

Proxies:
#of brains = population
quality of brains = proportion educated, and quality of education
self-regard = level and type of freedoms
challenge faced by brains = level of openness and competition in society
opportunity = infrastructure, access to information, rule of law (property rights protection), protection of innovation, speed of justice, freedom to exchange

This model can be tested. Some of these factors are correlated and inter-related (quality of brains = f (self-regard) and vice-versa). After further analysis an empirical model can be established.

Note: Given sufficient challenge and opportunity, even an uneducated brain will innovate. This is typically known as jugaad.

Addendum

I'm reverting to this blog post today (14 Sep 2012) to emphasise dignity. Dignity is not just self-regard but the way one is treated by others. It seems to me to be very hard to expect someone who is treated without dignity to be innovative. Possible, but hard.

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3. Preachers, Teachers, Doers – a theory of leadership
4. The rapidly increasing pace of innovation by Indian businesses
5. Hindu Dharma and capitalist institutions #4: Institutions of innovation
6. An obstacle theory of development
7. Really bad teaching of political theory – by a confused academic named David Miller
8. Jealousy as a driver of innovation and growth! There’s some merit in this idea.
9. Can I see Arvind Kejriwal’s theory of state (or of Anna Hazare), please?
10. The theory of evolution survives turbulence