There is plenty of innovation, even in the United States, and despite the patent system.
It is difficult to see innovation because our lifestyles quickly adapt to it. Let me give you three examples of major innovations during the past 20 years or so:
1) You can now obtain just about anything with very little effort. Wanted a rare book, a used import auto part, some kind of odd screw, or an antique coin, in 1980, and you'd have to spend lots of money and days, weeks, or years tracking it down. You might fail. Nowadays, if something is out there that you want, it's probably being offered on the Internet. Let's say that you want a couch for nothing. How would you do that in 1980? Today you can post a message on craigslist and someone reading it might respond by telling you to come and pick up. Maybe he's willing to get rid of it for 50 bucks.
2) For pennies a day you can communicate with a billion people, and you can broadcast your wants and and desires to a like-minded group. Doesn't matter where they live. Around 1985 zone calls (> 25 miles away) cost $8.00 an hour. Long distance to different area codes in the United States was a bit cheaper at around $5.00 an hour. That's communicating with one person at a time, or to a bulletin board system, which had very limited communities of a few hundred people or maybe a few thousand.
3) Myspace 2-3 years ago and Facebook and Twitter today. Not even in 2005 could you communicate with a pool of hundreds of millions of people with such ease.
Point is, we have tons of innovation and it is happening at a rapid pace. We're taking it up so quickly we don't even notice.