The institutional environment allows innovators and entrepreneurs to take calculated economic risks. In the U.S, innovation originates from education and research, while competition is made possible by a cluster of laws and financial regulatory institutions. Creative education, innovative research, legal institutions and financial regulations function together to enable a highly dynamic and innovative economy. We first give a brief introduction of the relationship between innovation, entrepreneurship and institutions. We examine the entrepreneurial environment, including barriers to entry, to growth and to failure. Next, we discuss educational institutions that nurture innovation and entrepreneurship. Education innovation (collaborative knowledge building, flexibility, improvisation and action-learning) and innovative research (government funding for R&D, the tenure system and technology transfer) play an important role in encouraging entrepreneurship. Third, we discuss the legal environment for the U.S innovation system, including patent law, an independent judiciary and contract enforcement, financial regulation and antitrust law. Finally, we review related research on national innovation systems and draw a comparison observing the differences between Chinese and U.S. institutions related to innovation and entrepreneurship.