The story opens with a Media Break news report which shows that living conditions in Detroit have not improved since the introduction of RoboCop, a cybernetic police officer constructed from the body of Officer Alex Murphy. RoboCop has brought success to police work in Detroit, however, the police force are on strike because their parent company, Omni Consumer Products (OCP) have cut their salaries and benefits.
At the same time, a new highly addictive designer drug, Nuke, has exploded in use on the streets. The drug is supplied to Detroit by a mysterious cult leader, Cain, who uses brutal terror tactics to his advantage; one tactic includes the assassination of the Surgeon General during a conference where he warns of the dangers of Nuke.
In the meantime, an ambitious psychologist, Juliette Faxx, has been working on a project that could potentially replace RoboCop with an improved model. Faxx' attempts so far have failed on all levels because the deceased men who are transformed into cyborgs all destroy themselves due to the psychological trauma involved. Faxx suggests that they look for candidates who might find the transformation desirable. Her search begins with hardened criminals with deep-seated psychological conditions.
Additionally, the mayor of Detroit, Kuzak, finds himself in a precarious situation; the city financial deficit has grown to an obscene amount and OCP is now threatening to buy Detroit out like they would any other company.
While dispatching a small group of criminals who rob a gun store, RoboCop discovers the criminals are Nuke addicts, and he interrogates the gang's only survivor for the location where the drug was bought. Murphy goes there and breaks into building, finding a Nuke production lab. Among the workers, who are mostly illegal immigrants, Murphy sees Cain himself. Though Murphy and his partner, Anne Lewis, are able to take out several of the lab's guards, Cain is able to escape. Cain's junior operative, a teenager named Hob, takes a pot shot at Murphy, knowing that the cyborg's programming will not allow him to shoot at a child.
Setting up surveillance at a video arcade, Murphy and Lewis spot Hob meeting with a police officer, Duffy. After Hob opens fire on the police unit sent to the arcade, Murphy moves in and apprehends Duffy, who had been selling information on police car dispatches to Hob, who plans to ambush them. Murphy brutally beats and interrogates Duffy, demanding to know where Cain is. Duffy finally gives up the location. As retribution for selling him out, Cain has Duffy captured and then has the surgeon kill him by vivisection.
RoboCop drives to Cain's hideout where he is quickly disarmed and captured by Cain and his minions, including Hob. He is bound to a table and dismantled by the gang; he is later dumped in pieces in front of his police precinct. OCP assumes charge of his repair, however they delay the process, citing the expense involved. Simultaneously, Faxx works with a focus group of community members who would like to see RoboCop's image made more positive. She reprograms Murphy with a long list of new directives that turn him into a sensitive police officer who is ineffectual at fighting the brutal criminals he was so effective against in the past. While out on patrol with Lewis, Murphy refuses to shoot a man who has opened fire on him and is leading a Little League baseball team in robbing an electronics store. Sensing that he is unable to do his job effectively, Murphy exposes himself to a monstrous current of electricity from a nearby substation and erases all the directives implanted by OCP and Faxx. Rallying his fellow officers from their strike, he leads them in a major assault against Cain at one of his Nuke processing labs. While the officers take out Cain's crew, Murphy pursues Cain directly and captures him when he forces Cain's truck to crash. Hob assumes control of Cain's operations and money.
Cain is left in critical condition and is approached by Faxx, who promises him immortality. She shuts off his life support system and allows him to die, intending to implant his brain in RoboCop 2, the newest cyborg body OCP has constructed. Because of the pain of the transformation and his withdrawal sickness from Nuke, Faxx promises Cain an unlimited amount of his own product in exchange for assassinating Mayor Kuzak in his new robotic body.
During a failed telethon to raise money for the city, the mayor receives a call from Hob, who has assumed control of Cain's Nuke empire and holds Cain's assets. Kuzak meets with Hob, who promises to bail out the city's deficit in exchange for permission to deal Nuke on the streets without interference from the law. Cain bursts in on the meeting and slaughters nearly everyone, including Hob. RoboCop arrives at the scene and finds Hob and comforts him in his final moments. The Mayor escapes assassination, however news of his attempted deal with Hob leaks to the press, further damaging his fragile public image.
The head of OCP, known as the "Old Man", calls a public meeting to announce that his vision for a renewed Detroit, Delta City, will be revealed. The Old Man also admits that the influence of Nuke is still an issue, however RoboCop 2 (Cain), will be introduced to the streets to combat crime as a replacement for the original RoboCop. When The Old Man shows the audience a canister of Nuke and speaks of a new initiative to rid the streets of it, Cain suddenly becomes agitated and tries to grab it for himself. Murphy enters the meeting, prompting Cain to seize the remote that controls his deactivated defense systems from Faxx. He arms himself and opens fire on both Murphy and the crowd, killing several people. A ferocious battle erupts between Murphy and Cain that spills out onto the street. When Murphy and Lewis realize that the police force assembled outside are powerless to stop Cain, Murphy suggests that they give Cain the canister of Nuke, which they do. Temporarily distracted by the drug's effect, Murphy is able to leap onto Cain from behind and rip out his central nervous system and smash it, rendering Cain's mechanical body useless.
Inside the OCP tower, The Old Man and his assistant, Johnson, decide that the blame for the incident will fall on Julia Faxx. The movie ends with Murphy and Lewis reflecting on their victory over Cain.