The limit is usually due to the build in screen.
The physical size of the screen has nothing to due with it. There is not reason (bar expensive manufacturing) why a 14 inch screen can not be build with a much higher native resolution. That would result in a much crispier image (and more load on the GPU).
As for the Intel HD3000: It can display higher resolutions. You can confirm this yourself by plugging in an external monitor and using that. E.g. if you used a 1920x1200 monitor then the HD3000 would happily drive that.
Going back to the build in screen: Lenovo confirms that on this page. Your laptop is manufactured with either a 1366 x 768 screen with 220 NITS (NITS=brightness) and a better screen which can do 1600 x 900 at 250 NITS. You selected the cheap/inferior screen.
There are two ways to get around this:
- Switch the laptop to the model with the better screen.
- Use an external monitor to gain a resolution up to 2560x1600