Google's Nexus 7 comes with a relatively powerful nVidia Tegra 3 processor, which is more than capable of processing HD video. The popular tablet also sports a 1.2 megapixel front-facing camera that translates into a resolution of 1280 by 960. Although there are no hardware limitations, Google ships the Nexus 7 with only VGA resolution video recording. If you're disappointed with that, there's a fairly easy fix that enables you to record better quality 720p video.
Like most mods, you'll need root access to upscale the video capturing resolution. Because there's no media profile telling Android how to capture 720p, you will need to add one by modifying '/system/etc/media_profiles.xml'. The mod was discovered by XDA developer 'hillbeast', who explains in a forum post how to make the necessary modifications.
Here's a comparison from the XDA forum post between the 480p and 720p capturing.
Standard VGA, or 480p recording
Modified 720p recording
Because the Nexus 7 lacks a rear camera, the mod is best suited to enhance your video chats. It's strange why Google and Asus didn't enable the HD video recording by default and it remains unclear if Google will add the feature in a future update.
Source: XDA Developers