One of the mainstays of roleplaying games has been the use of races to provide options at character creation. While this fits in well with the history of fantasy RPGs and to some extent Sci Fi ones, it may not always be appropriate to the setting. Likewise, there are some arguments to whether players should be limited to playing only humans even in a fantasy setting and we shall look at these below.
To race or not to race
The first question to ask is do you need them in the setting? This should be a fairly simple question to begin with, as your setting (or scope for settings) coupled with your game vision should tell you this. Regardless of the genre, only you can decide if you want different humanoid species wandering around your world, but if you do, the next big question is whether your players should be allowed to use them.
The reason to ask this question comes down to what has been termed 'funny hat' roleplaying. I won't go into the details on this, but essentially the danger with well known races is that players fall into the trap of stereotypical roleplaying that has no depth. How often do you see the dwarf warrior who loves to drink, runs into battle without thinking and has a Scottish accent? Similarly, a haughty elf who loves nature, dancing and singing. These things won't necessarily be untrue of some members of these races, but surely not all of them, and that can't be all there is too them. For more on this argument, it's worth looking at the many RPG forum discussions out there and The Games Master by Tobiah Panshin where it is explored in much more detail.
If essentially your races are in the game just to provide mechanic bonuses and penalties, then do you really need non-humans at all, or could have options for your human races. There are many ways to do this, you could simply have racial bonuses for humans from particular regions or heritages, or alternatively, have an advantage/disadvantage style pick system to tailor your character based on how you feel they have developed. This could perhaps link in some way to character background during character creation, but the specifics are less important than the principle question. Do you need these other races?
In a fantasy setting, races such as elves, dwarves and orcs are iconic and the temptation will be to always add them. Thinking about the section above, this does also make them the most at risk of falling foul of stereotypes. This does not mean you shouldn't have them, you and your players may be more than happy to have such stereotypes, and indeed it may be what makes it fun for you, but if not, then beware this pit fall.
One way to avoid it is have these races in your game, but not as playable characters. This would still allow these cultures to exist, but players would be humans observing them from the outside. This could allow the referee to maintain the mystique and alien nature of the non-human races, while keeping to the standard fantasy expectations. That is, if you want to keep to expectations.
In your game, you don't have to conform to such norms. If you have a unique setting, why not shake things up a bit. You could have evil, tribal elves who war against humanity, or peace loving dwarves who are at one with nature. It really is up to you, and sometimes putting things on their head like this can be fun.
Another great option that may require more work, but could be very rewarding, would be to create your own fantasy races. If you avoid trying to make them stereotypical, and instead highlight facets of their culture, you could free your players to do something different, and even start to contribute to the make up of these races.
Fantasy races can be fun, but always link back to what you want, and how you want your players to roleplay in your game.
Some would argue that fantasy races are aliens in a way, as they're not human, but here I refer to aliens from a Sci Fi perspective. If you do intend to include them in your game, then again consider if you want them as player characters or just as NPCs or monsters. Here more so than fantasy races you could run into problems with roleplaying. Aliens by their very name are alien to us. Having come from other worlds or even dimensions, would we really have any understanding of what was going on inside their minds?
In a way, you may not care. You might rather have them as Sci Fi versions of the fantasy races (and some games do just have elves, dwarves and orcs in space) and that's fine if you want it. Again it's about the type of game you want, and what's important to you and your players, not what other people tell you about roleplaying aliens.
Depending on your setting, you also might fall foul of stereotypes if you use, or are inspired by, a well known setting. You only have to look at Star Trek to see the many put falls there with stereotypical Klingons or Vulcans. Again, if that's what you want in your game, then don't let anyone else put you off.
At first it may seem counterintuitive for me to say that humans can be races in of themselves. If you think about it for a moment, however, then this is what we see in the real world. Humans exist as a species, but there are many races with their own cultures, languages and religions. Now you may not want to assign racial bonuses to humans of different races (although you can if you're happy to have human racial stereotypes), but it does give you scope for roleplaying and background opportunities without having to introduce alien races such as elves or Klingons.
You only have to look at George R. R. Martin's world in a Song of Ice and Fire to find a fantasy setting in which we don't really see non-human races (Children of the Forest and the Others aside). Despite this, we see a wide variety of races and cultures that provide a plethora of roleplaying opportunities. So, as I said at the beginning, consider if you even need these races at all.
Personally I don't mind the cheesy stereotypes of traditional fantasy games. I've not worried about the fact they may be a bit cliché, or that my friends and I don't make them alien enough. They add a bit of variety to our games, and give us some prompts to roleplay with, even if they are well used. That being said, I have run games with a all human cast, and these have worked really well too. You don't need a half-Orc race when you can have a 6 1/2 foot tall human with bulging muscles, so look to the rules that can free up your human races to fill those needs.
The use of non-human races can add an interesting element to any roleplaying game, but beware the risk of stereotypes arising, or races simply being used as a mechanic for stat raising and possibly abused by powergamers. There's always the possibility of making non-humans non-players, but consider how this will sit with your players and the ethos of your game. If in doubt, add them in and see what comes out during play.