How Do You Encourage Real Innovation?

Where I live in Massachusetts, no amount of signage or other early-warning systems seem to prevent trucks from getting stuck in our notoriously low-clearance tunnels and underpasses. Know what they use in Australia? Holograms.
Holograms and also waterfalls. You see, you need an actual surface to project the hologram on - one that can be lowered and raised easily regardless of passing traffic. When a too-tall vehicle approaches the Harbour Tunnel in Sydney, Australia, it trips a sheet of falling water that serves as the projector screen for a giant stop sign. You kinda can't miss it.
Do you know what this means? Among other things, it means that someone, somewhere had a really great boss.
I imagine a meeting about the problem of too-tall trucks, and a raised hand: "How about we use a hologram of a stop sign?" Better yet, someone suggested this new application for hologram technology and the person next to him said, "That might work, but you'd need a giant waterfall to project it on." It's all about setting the tone for open-ended problem solving, and that starts at the top.
Part of the boss's job is to create a workspace that values and encourages a certain amount of spitballing. Where it's ok to bust out with some really dumb ideas because actually there are no really dumb ideas and maybe the next idea will be the one about saving millions of dollars in energy costs by turning off the lights in vending machines. (Or saving thousands of dollars each year by keeping trucks from getting stuck in your tunnels.) Same holds true if you are your own boss.
So...how do you encourage innovation? Have you ever had, or heard of, a truly great idea that changed the way you think about your job?
