When Creative Destruction and Industry Renewal Fail to Emerge: A Longitudinal Study of Lebanon’s Banking Sector

Abstract

Financial crises are often expected to trigger industry renewal through processes of creative destruction; however, this outcome is not automatic. This study examines why the mechanisms associated with creative destruction failed to emerge in Lebanon’s banking sector during the crisis. Using a qualitative longitudinal case study and process-tracing approach, the analysis draws on regulatory documents, financial data, institutional reports, and secondary sources covering the period from 2014 to 2024. The findings show that successive regulatory interventions contained short-term pressures while preventing the restructuring mechanisms associated with industry renewal from emerging. Instead, these responses preserved a weakened banking structure and reinforced three interconnected mechanisms: strategic inertia, capability erosion, and the failure of the restructuring mechanisms associated with creative destruction. Over time, banks lost much of their capacity to perform core financial functions, public trust declined, and households and firms increasingly relied on cash and informal financial channels. The consequences extended beyond the banking sector, weakening financial intermediation, investment, monetary stability, and broader economic recovery. The study contributes to strategic management theory by showing that creative destruction is not an automatic response to crisis but an institutionally mediated process. The Lebanese case demonstrates how weak governance, the absence of credible restructuring, and limited mechanisms for institutional exit and resource reallocation can prevent industry renewal from emerging. It further shows how prolonged reliance on short-term crisis management can erode organizational capabilities and preserve dysfunctional institutions rather than promote adaptation and renewal.