The best way to encourage innovation is to "stifle" it by producing unusual and complex situations that require creativity to circumvent. Regulation, because it is at least theoretically a codification of the desires of a large population, forces whatever innovation happens into a set of forms that are expected to be in line with the good of the people, while simultaneously making anything achieved more innovative in proportion with how much more intellectual and creative effort was required to achieve it.
That's encouraging innovation, but it's innovation specifically related to the regulation. It's a bit like saying, the best way to help people climb to higher ground is to first drop them into a pit.