Overseas students who graduate in Scotland will only be allowed to stay in the UK if they promise not to move to England for a set period.
David Blunkett said he has been misunderstood
Home Secretary David Blunkett believes that is the best way to ensure that the country retains fresh talent.
He was in Glasgow to support efforts to attract new workers from overseas.
Opposition politicians said the UK's immigration policies went in the opposite direction and were designed to stop people coming to the country.
But Mr Blunkett said his stance had been "totally misunderstood" in Scotland as he was opening up the work permit system while stopping people entering the UK illegally.
Scotland's population decline has been highlighted as "the greatest threat to the country's future prosperity" by First Minister Jack McConnell.
Work permit system
His Fresh Talent initiative aims to attract 8,000 new people to Scotland each year.
The moves unveiled in February included the creation of a relocation advisory service and the promotion of Scotland within the work permit system.
Foreign students will be given visas to stay and work for two years after they graduate.
Mr Blunkett said they wanted graduates to stay in Scotland rather than travelling to the south of England.
His talks with Mr McConnell on Friday included discussions on how to ensure that they remained north of the border.
"We don't want them to necessarily move south but there's a compact - that you can stay, you can hold a work permit, if you agree to a specific length of
time here in Scotland," said Mr Blunkett.
"Obviously after that, it's up to the individual but it's also up to the Scottish people to make people feel welcome."
He told BBC Radio Scotland that there was a need for Scotland to recruit people from overseas to correct an "imbalance" in the population.
Scottish National Party justice spokeswoman Nicola Sturgeon said the Scottish Executive had the right intentions when it came to immigration.
"We need to encourage managed migration," she said.
Mr McConnell and Mr Blunkett visited a Glasgow restaurant
"Unfortunately the UK's immigration policies often go in the opposite direction and are designed to stop people coming to this country.
"Until the Scottish Parliament has more power over immigration it is going to be very difficult to back up what the executive is trying to do with any meaningful action."
But Mr Blunkett defended his stance, saying: "I'm trying to stop people coming illegally to the UK.
"I'm trying to stop people using the asylum system, which is for those facing death and torture, as an economic migrant route, and instead open up the work
permit system massively.
"I have tripled the number of work permits since I became home secretary."
He also defended the ban on allowing asylum seekers to work, claiming that a change would leave the UK with "no border controls, no logical rational policy at all".
And he said the policy of managed migration was the way to overcome those who peddled "racism and misinformation".
Mr Blunkett's trip to Glasgow saw him visit a restaurant owned by entrepreneur Charan Gill, whose Harlequin leisure group employs 450 people.
He has been bringing highly-qualified staff to Scotland from India in his own version of the fresh talent initiative.
Mr Blunkett was met by about 30 protesters, including SNP MSP Sandra White and the Scottish Socialist Party's Rosie Kane.
Ms Kane said: "I'm scunnered that Jack McConnell can sup tea with David Blunkett while the Home Office is expanding Dungavel (immigration centre) to allow them to deport even more families who want to make their home in Scotland.
"David Blunkett says that he is misunderstood in Scotland. He shouldn't kid himself."