He has been a professor in the Otago philosophy department for the past 40 years and intends to retire at the end of this year.
In national performance-based research fund assessments, the Otago department has been twice rated as New Zealand's highest-performing university research department in any academic discipline.
The scholarship appeal was launched by vice-chancellor Prof Sir David Skegg at a function at the university this week.
Visiting United States-based philosopher Prof William Lycan, of the University of North Carolina at Chapel Hill, who is a William Evans Fellow at Otago University, gave a guest lecture in Prof Musgrave's honour.
Otago philosophy head Dr James Maclaurin said it was hoped to raise sufficient funds so the proposed Musgrave Scholarship would enable international students to undertake masters degree study at the department. It was hoped the scholarship would begin in 2012.