Yes, it's possible that the VM scales the display. For example, SqueakJS has a "fixed resolution" mode where it gives Squeak a fixed-sized screen to draw in, and scales that to whatever size the browser window is. Inversely, it scales system mouse events to Squeak's virtual resolution. See for example here:
When you resize the browser window, the image does not even notice.
AFAIK no other VM does that, but it would certainly be possible to add.
We did need that feature for displaying the OLPC version of Etoys (which runs at a fixed 1200x900 resolution) on other platforms. To avoid having to add this to all VMs (Windows, Mac, X11), Andreas set up the "internal scaling" you mention which uses WarpBlt. But indeed there is a noticeable slow-down, and having this feature in the VM would be much better.
- Bert -