The OLS often refuses to consider the explanatory variables with spatial dependence (Wu et al., 2020). However, the SEM considers spatial dependency in the OLS error term (Mollalo et al., 2020) by decomposing the error term of OLS into two components, including the error term and the random error term. The formula of SEM is as follows: (Ward & Gleditsch, 2018)
where signifies the coefficient of spatial component errors, represents the weight matrix (a vector of spatial weights) which determines the neighbors at country and connects the independent variable to the explanatory variables at that country, and describes the spatial error component.
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