The Art of Interactive Design by Chris Crawford
"A Brief Rant on the Future of Interaction Design" by Bret Victor
Crawford and Victor both agree that two-way communication or signaling is a necessary aspect of interactivity. However, while Victor espouses the implicit physical interaction with a book or a glass of water, Crawford denies such objects' interactive capabilities.
Unfortunately, I think Crawford mistakes content for medium. A book's content is its words and images, and its medium is the physical presence of its paper, pages, and binding. Both content and medium must be analyzed together as parts of a whole system in order to understand that system's level of interactivity.
It is true that a book's content does not change, but it can be argued that its physicality does change. As a book is read and manipulated, its physicality is altered depending on, among other things, the way the book is handled and the page currently being read. Similarly, a glass of water changes through the act of holding, drinking, and refilling.
I would define physical interaction as two-way communication or signaling based on an object's physicality and/or the physical senses of the user. An object could be said to be physically interactive if it can both accept and provide sensory information to and from a user. Good physical interaction, then, requires the manipulation of physicality and sense in meaningful ways to achieve some end.
Apple TV is an example of digital technology that is not very interactive by the above definition. The interaction is mediated through single button-presses that keeps the user sensorially disconnected from the technology.