This review describes some of the properties of retinoic acid (RA) in its functions as a locally synthesized differentiation factor for the developing nervous system. The emphasis is on the characterization of the metabolic enzymes that synthesize and inactivate RA, and which determine local RA concentrations. These enzymes create regions of autocrine and paracrine RA signaling in the embryo. One mechanism by which RA can act as a differentiation agent is through the induction of growth factors and their receptors. Induction of growth factor receptors in neural progenitor cells can lead to growth factor dependency, and the consequent developmental fate of the cell will depend on the local availability of growth factors. Because RA activates the early events of cell differentiation, which then induce context-specific differentiation programs, RA may be called a master differentiation factor.