In my dissertation, I study how legal institutions and financial system affect innovation and their impact on economic growth. This dissertation consists of two chapters. The themes of chapter 1 and 2 are intellectual property rights and the venture capital system, respectively. Chapter 1 studies the impact of intellectual property rights on the business scope of firms. Stronger intellectual property rights induce specialization and contribute to economic growth. In the United States, a sweeping legal reform in 1982 created a more pro-patent legal environment. This legal reform fostered specialization and enhanced firm performance. Around the world, countries experience faster economic growth when their innovating sectors are characterized by a higher level of specialization. An endogenous growth model with endogenous firm boundaries is developed to disentangle the relationship between legal institutions, firm boundary decisions, and economic growth. I characterize the optimal strength of patent rights and evaluate the actual patent law enforcement in the United States. The pro-patent legal reform in 1982 was welfare-enhancing, but it was too extreme. Swinging back the legal pendulum and weakening patent rights can improve welfare. Chapter 2 evaluates the contribution of venture capital (VC) to promoting entrepreneurship and spawning innovation. We assemble the stylized facts of venture capital, innovation, and economic growth. Funding by venture capitalists is positively associated with patenting activity. VC-backed firms have higher IPO values when they are floated. Following flotation, they have higher R&D-to-sales ratios and grow faster in terms of employment and sales. At the country level, VC investment is positively linked with economic growth. The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. The model is matched with stylized facts about venture capital; viz., statistics by funding round concerning the success rate, failure rate, investment rate, equity shares, and the value of an IPO. We examine how the innovative activity is affected by the capital gains tax rate. Raising capital gains taxation reduces growth and welfare.