SciDev.Net has published a terrific set of articles looking at the relationship between innovation and development. Innovation doesn't just mean coming up with new ideas; innovation is coming up with applications of new ideas, or even new applications of old ideas. Innovation also has an element of interaction, as it's often a conversation between inventors (who have "codified knowledge" of the function of a new system or technology) and the users (who have "tacit knowledge" of how such systems and technologies fit into their lives and work).
The key distinction between invention and innovation is this focus on use -- inventions are potential change, innovations are changes realized.
In a brief article, Andrew Barnett focuses on the connection between innovation and the reduction of poverty. His essay is a good introduction to innovation systems, and a clear exploration of what conditions are necessary for innovation to succeed as a part of development.
...innovation takes place within a social system of which research and researchers form only a part. Other essential components are the networks of actors that provide communication channels linking organisations and individuals.
Such networks can be both formal and informal. But informal links are particularly important, as they foster trust between the various parties. This results in both parties knowing each other's needs, and knowing the nature and quality of the goods and services on offer.
Eva Dantas provides a much more complete exploration of the application of innovation to development. Her set of essays are more detailed than the Barnett piece, but also more directly relevant to development. She provides two case studies of innovation in the developing world -- both focusing on biotechnology -- as well as some overall guidelines for policymakers.
In developing countries, technological learning defined as the process of accumulating a capacity to innovate usually results from the experience gained during a series of increasingly complex activities. Initially these tend to focus on the acquisition of foreign technologies, and their imitation. Subsequently there are attempts to modify imported technologies through incremental changes. Finally as illustrated by the newly industrialised countries in East Asia an indigenous capacity to carry out R&D-based innovation can emerge.
Government policy should respond to the needs of both countries and organisations at each stage of this evolutionary process. For example, at an early stage of a country's economic development, policies should support efforts to imitate and adapt foreign technologies, as well as increase the education levels of the population. As the capacity to adapt technologies increases, policy measures should focus increasingly on strengthening R&D capabilities particularly those relevant to local needs -- in the business sector, in higher education institutions (such as universities), and in public research laboratories.
I worked for several years with an organization that provided innovation system consulting for corporate and government clients, so the language in these two pieces is quite familiar, and the advice they give sound. Innovation is the cornerstone of leapfrogging -- new technologies and ideas applied in ways which are both appropriate to and transformative of the local context. As much as we talk about the value of scientific research as a tool for development, its real importance lies in the application of that research to making people's lives better.