We have studied the electronic structure of hexagonal MnAs, as epitaxial continuous film on GaAs(001) and as nanocrystals embedded in GaAs, by Mn 2p core-level photoemission spectroscopy. Configuration-interaction analyses based on a cluster model show that the ground state of the embedded MnAs nanocrystals is dominated by a d5 configuration that maximizes the local Mn moment. Nanoscaling and strain significantly alter the properties of MnAs. Internal strain in the nanocrystals results in reduced p-d hybridization and enhanced ionic character of the Mn-As bonding interactions. The spatial confinement and reduced p-d hybridization in the nanocrystals lead to enhanced d-electron localization, triggering d-d electron correlations and enhancing local Mn moments. These changes in the electronic structure of MnAs have an advantageous effect on the Curie temperature of the nanocrystals, which is measured to be remarkably higher than that of bulk MnAs.