"My ideal situation would be a bike that can be carried in a backpack and could accompany anyone on a trip anywhere as the sole method of (land) transport, irrespective of terrian, and be equally at home in a car-boot or overhead rack on a train."

then by all means, consider 20" or 16" wheels.

"The wheels themselves will reduce in size too."
This could be really interesting, as long as the weight and performance penalty is not severe. Another issue is replacement parts in far off places (like the Amazon).
Also, if you can reduce a 26" wheel enough to fit in a back pack, imagine the same technology on a 20" wheel that really reduces down to a manageable size! You could really be onto something then.

"Part of the design necessitates an upper frame that is made from two pieces, meaning that the minimum clearance between your knees (when pedalling) will be about 140mm"

I would strongly caution against this, as any cyclist who needs to go a fair distance without damage to the knees will want to pronate, or "toe-in" a bit, and bring their knees as close as possible to the top tube. In fact, on of the really nice things about most folding bikes is the complete absence of a top tube, giving the rider more freedom of movement, and easing mount/dismount.